After hovering above the Reserve Bank’s comfort level of 6% for much of this year, retail inflation is easing slowly and will ease further in the coming months amid global uncertainty. Efforts may continue. India’s fight against inflation will continue in the face of global uncertainty High prices for crude oil, cooking oil, legumes, and vegetables were among the main reasons for the high inflation during the year. The trend came amid the conflict between Russia and Ukraine that began in February, disrupting global supply chains and pushing up prices for many commodities. Since May, the Reserve Bank of India (RBI) has raised its short-term borrowing rate (repo) by 2.25 percentage points to reach a nearly three-year high of 6.25%. The Consumer Price Index The Consumer Price Index (CPI)-based retail price index rose above the RBI’s comfort level of 6% in January and then rose for nine months before falling to 5.88% in October. The RBI paper on “The Anatomy of Rising Inflation in India” states: Put pressure on the price and make it permanent.” Recently, RBI Governor Shaktikanta Das weighed in on the inflation trajectory amid geopolitical tensions, global financial market volatility, the imminent shift of input costs to domestic production prices, and weather-related turmoil. said the uncertainty was significant. “Core inflation (CPI excluding food and fuel) has been stable at around 6% for several months. So there is no room for complacency and the fight against inflation is not over yet. We need constant vigilance against it,” he said earlier this month. Inflation was a major challenge for regulators around the world, including in the US, UK, and Europe, during 2018 as commodity prices skyrocketed due to supply chain disruptions caused by the conflict between Russia and Ukraine. The conflict comes at a time when the global economy is slowly recovering after being hit hard by the coronavirus pandemic. For the first time since the Monetary Policy Committee (MPC) was established in 2016, the RBI has submitted a report to the government, saying it has failed to keep inflation within its target cap tolerance for three straight quarters since 6% in January. I explained why. On the wholesale front, things didn’t turn for the better as inflation remained in the double digits until September, before plummeting to 5.85% in November. The RBI forecasts overall average inflation of 6.7% for the current financial year. We expect retail inflation to ease to 5.9% in the March quarter from 6.6% in the December quarter. Inflation is likely to ease over the next 12 months due to faster planting of winter crops, better water levels in reservoirs, and easing commodity prices, according to rating agency Icra. “Our forecast annual inflation rate of 5.9% to 6.1% in December 2022 results in an average CPI inflation rate of roughly 6.2% in the third quarter of fiscal 2023, which is notably higher than the MPC’s projection for the period (+6.6%). 0%). “Thereafter, we project average CPI inflation to dip to 5.8-5.9 percent in Q4 FY2023, before declining to 5.2 percent in Q1 FY2024,” Aditi Nayar, Chief Economist at Icra, said. She also stated that the MPC’s decision on the repo rate in February 2023 will be heavily data-dependent, drawing cues from domestic inflation-growth dynamics, as well as the outlines of the Union Budget for FY24.
India’s Foreign Exchange Reserves: Falling Faster than thought
According to RBI statistics, India’s foreign exchange reserves fell by USD 691 million to USD 562.808 billion as of December 23, marking the second consecutive week of loss. The aggregate reserves fell by USD 571 million to USD 563.499 billion in the prior reporting week, breaking a five-week trend of rising reserves. India’s foreign exchange reserves fell by $691 million for the second week in a row The country’s foreign exchange reserves hit an all-time high of USD 645 billion in October 2021. The reserves have been falling as the central bank utilized them for safeguarding the rupee against pressures brought on mostly by foreign developments. According to the RBI’s Weekly Statistical Supplement, foreign currency assets (FCA), a significant component of total reserves, fell by USD 1.134 billion to USD 498.49 billion for the week ending December 23. Foreign currency assets, expressed in dollars, comprise the effect of appreciation or depreciation of non-US units such as the euro, pound, and yen held in foreign exchange reserves. According to the report, gold reserves climbed by USD 390 million to USD 40.969 billion. The Special Drawing Rights (SDRs) increased by USD 8 million to USD 18.19 billion, according to the apex bank. According to the statistics, the country’s reserve position with the International Monetary Fund (IMF) increased by USD 45 million in the reporting week to USD 5.159 billion. A decrease in foreign exchange reserves can have several negative effects on the country’s economy. Some of them are: Reduced import financing capacity: Since foreign exchange reserves are used to pay for imports, a reduction in foreign exchange reserves can limit a country’s ability to import goods and services. This can lead to shortage of essentials and lower living standards. Weak currency: A decrease in foreign exchange reserves can lead to a devaluation of the domestic currency as demand in the foreign exchange market decreases. This could increase the price of imported goods and make it more expensive for the country to borrow money from foreign lenders. Also Read: Union Budget 2023: what should you anticipate Declining confidence in the economy: A decline in foreign exchange reserves may be seen as a sign of economic weakness, and thus may reduce confidence in the economy. This can lead to capital flight as investors and companies draw money out of the country. Higher Borrowing Costs: A decline in foreign exchange reserves could lead to a decline in a country’s credit rating and increase borrowing costs for governments and the private sector. This can make it difficult for countries to fund infrastructure projects and other investments. Difficulties in stabilizing the economy: Foreign exchange reserves are often used to stabilize exchange rates and control inflation. Declining reserves could make it more difficult for central banks to meet these targets, leading to economic instability.