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High Inflation may moderate in 2013, prompting RBI to cut Rates

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It is expected that the rising inflation, which is the cause of slowdown in the nation’s growth; may ease somewhat in the year 2013, owing to easing supply which was quite stubborn in the year 2012. The efforts by Government and RBI to control inflation went in vain and the regulatory bodies were unsuccessful in controlling the rising food prices.

Wholesale & Retail Price Inflation

As per the inflation data released, the wholesale price-based (WPI) inflation hovered over 7% through 2012 which was down from 10% from the previous year. This very well showed the tighter monetary policy implemented by the Reserve Bank, to control rising inflation. But if the historical numbers are compared, we find that the level of 7% still have scope to be corrected and brought down.

On the other hand, if we see the retail inflation which is based on consumer price index (CPI), the index was close to double digit at 9.90% in November. In order to control the rising inflation, the reserve bank hiked the interest rates for whooping 13 times, between the periods of March 2010 to October 2011, which was the highest ever interference of the central bank to tame the rising inflation. The total increase in rates by over 375 basis points helped control inflation slightly but the numbers were not well appealing.

After a long stint of rising the policy rates, April 2012 showed some change when the inflation numbers were easing; thus allowing RBI to lower the policy rates by 0.50 percent. Recently, RBI decided to keep its policy rate unchanged which led to heavy criticism from the finance ministry. The apex bank faced huge pressure from the government and the industry to relax the rate, so as to promote growth. However, RBI in order to maintain the inflationary levels for the common man’s reach, went for no change in the rates.

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Upon the decision of RBI, disappointed Finance Minister said:

“Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone … “Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence”

As far as the policymakers are concerned, a faltering economic growth was a bigger concern for them, as they tried to boost investments and speed up the growth engine. It is needless to say that the economic growth for the country has slipped heavily to the level of 5.4% in the current fiscal, from 7.3% a year ago. As far as the rate cut is concerned, RBI indicated its plan for rate cut in January meeting which might come after the moderating inflationary results.

RBI in its mid-quarter policy review said, “In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards”

Inflation in Food items & Day to day Commodities

In case of WPI, the decline in inflation from 8.01% to 7.24% in November 2012, has been seen as a great step which could lead to fall in prices of manufactured products, primary articles and power. In case of products like crude petroleum, non-food articles, cereals, protein foods, edible oils, beverages, etc. which is affected by the end customer demand and is of retail nature, inflation has been worrying. The higher international crude prices, changing consumption pattern, in-efficient supply chain management etc. has led to the rising prices of such commodities.

In order to overcome such problems, Government decided to make some policy changes so as to augment supply while improving storage and warehousing facility. These changes can only be possible with the allocation of proper financial budget, which is in turn related to the economic growth. Thus the Government expects inflation to moderate to some extent in the current quarter, which would help RBI lower the policy rates. This will enable proper measures to be taken, to boost the growth of the economy and infrastructure could be developed, to check the irregularity in the supply chain of commodities.

Thus it is expected that RBI would very soon cut the rates on moderating inflation in the year 2013.

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Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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