Inflation is expected to start softening by July 2022 on the back of diminishing unfavourable base effect particularly in food articles and liquidity drain as RBI has increased the repo rate by a significant 40bps recently, said the industry body PHD Chamber of Commerce and Industry in a press statement issued here today.
Monetary tightening will have an impact on consumption demand and resultant price corrections in the various goods and services in both consumption and whole sale segments, said Mr. Pradeep Multani, President, PHD Chamber of Commerce and Industry.
Also, increase in interest rates by advanced economies will have impact on international commodity prices as cost of inventory carry by speculators will go up and there will be significant price corrections, said the industry body.
Recently, RBI increased the policy repo rate by 40bps to 4.4% and also raised the cash reserve ratio by 50bps to 4.5% which will drain Rs. 87,000 crores liquidity from the banking system.
It is the first-rate hike since 2018 as persistent inflation pressures are becoming more acute, said Mr. Multani.
Increase in loan EMIs would impact the consumption sentiments and reduce demand in the economy which would lead to corrections in whole sale prices, he said.
A study by PHDCCI on Inflation Expectations stated that the overall WPI inflation showed an upward trend during the last 12 months. The WPI inflation mainly consists of manufactured items which have a weight 64.23%, fuel and power with weight of 13.15% and primary articles with weight of 22.6%.
The WPI inflation stood at 15.1% in April 2022 as compared to 10.7% in April 2021. The recent rise in WPI inflation is majorly because of the rise in oil and other essential commodity prices on the back of geopolitical distress.
WPI Inflation remains in the double-digit since the last 13 months. CPI Inflation remains above the RBI’s upper band for the fourth consecutive month.
PHDCCI study stated that the annual CPI inflation rate in India accelerated for the continuous 7th month to 7.8% in April 2022. Food and Beverages inflation increased to 8.1% in April 2022, the highest reading since November 2020, with cost of oils and fats, meat and fish, and vegetables recording the biggest rises. Other upward pressure came from prices of fuel and light, clothing and footwear, housing and pan and tobacco.
Going ahead, in case of CPI, the statistical affect will also start diminishing from the month of October-November 2022 and inflation will be expected to start continuously softening towards the normal range of RBI upper band.
5 prone strategy to soften the inflation, according to PHD Chamber –
1. Possible cut in the state excise duties especially on the petroleum products.
2. Strengthening of the global value chains and shifting of the sources of the imports from higher price to low price countries.
3. Import substitution for the technology intensive and labour-intensive products where India has a high imports category and comprises higher import shares.
4. Enhancing indigenous production possibilities where there is high demand for the commodities.
5. Measures for preventing hoarding of the essential commodities to stop price accelerations.
Disclaimer: This publication is for information purposes only. Though due care has been taken to ensure accuracy of information to the best of the PHD Chamber’s knowledge and belief, it is strongly recommended that readers should seek specific professional advice before taking any decisions.