To strike a balance between inflation and development, the Monetary Policy Committee has kept the repo rate unchanged at 6.5 percent in the latest monetary review. Earlier, the repo rate was increased in February 2023.
The Reserve Bank mainly tries to fight inflation by increasing the repo rate. When the repo rate is high, banks get loans from the Reserve Bank at a higher rate, due to which banks also give loans to customers at a higher rate. By doing this, the liquidity of money in the economy decreases and because of lack of money in the pockets of the people, the demand for goods decreases. Further, due to the high price of goods and products, their sale decreases & owing to which, a decline in inflation is recorded.
Similarly, in case of slowdown in the economy, efforts are made to increase the liquidity of money in the market to accelerate the developmental work and for this also the repo rate is cut, so that banks get loans at cheaper rates from the Reserve Bank and after getting loans at lower rates, the banks also give loans to the customers at tawdrier rates. At present, the inflation rate remains a matter of concern for the government and the Reserve Bank of India.
According to Care Edge Rating, despite the loan rate not softening, the loan growth rate has been around 16 percent in the financial year 2023-24 and it is estimated to be between 14 to 14.5 percent in the financial year 2024-25. Such a situation is very positive for the Indian economy. However, it can be called an exceptional situation. Anyway, due to the pace of lending remaining fast, both economic activities and growth rate are picking up. For this reason, the Reserve Bank of India has increased its growth forecast for the financial year 2025 from 7.00 percent to 7.2 percent.
The GDP growth rate in the fourth quarter of FY 2023-2024 was 7.8, while it was 6.1 percent in the same quarter last year. At the same time, the GDP growth rate in the financial year 2023-24 was 8.2 percent, which is 1.2 percent more than the estimate of the Reserve Bank of India i.e. the Reserve Bank had estimated the GDP growth rate to be 7 percent during the financial year 2023-24. Here, it is important mention that, the GDP growth rate was 7 percent in the last financial year.
According to the Ministry of Statistics, the growth rate remained high during the period under review due to strong performance in the manufacturing and mining sectors. The manufacturing sector has grown by 9.9 percent, which was minus 2.2 percent in the financial year 2022-23. Similarly, the mining sector grew at the rate of 7.1 percent during the financial year 2023-24, which was 1.9 percent in the financial year 2022-23. It is noteworthy that the manufacturing sector plays an important role in employment generation.
Retail inflation is still a matter of concern and it is estimated that there will not be much softening in retail inflation in summer. However, there may be some softening in it in the winter season. Although the Reserve Bank of India has projected inflation to be 4.5 percent in the financial year 2025, but this level is not enough to take a decisive decision for development. Wholesale inflation rose to a 15-month high of 2.61 percent in May, while it was 3.85 in February 2023. At the same time, it was 1.26 percent in April 2024, which was the highest level in 13 months. It was 0.53 in March 2024 and 0.20 percent in February 2024.
The National Statistical Office released the retail inflation data on June 12, 2024, according to which retail inflation was 4.75 percent in May, which was the lowest level in 12 months. There was some reduction in retail inflation in the month of April, but it was slightly higher than the month of May at 4.83 percent. Retail inflation was 4.81 percent in June 2023, while it was 4.44 percent in July 2023.
Inflation is directly related to purchasing power. For example, if the inflation rate is 6 percent, then the value of Rs.100/- earned will be only Rs.94/-. Therefore, investors should invest according to the level of inflation, otherwise they will get less returns.
The rise and fall of inflation depend on the demand and supply of the product. If people have more money, they will buy more products and buying more products will increase the demand and if the supply is not according to the demand, the price of the products will increase. In this way, the market will get caught in the vicious cycle of inflation. Excessive flow of money in the market or shortage of products causes inflation. On the other hand, if the demand is less and the supply is more, then inflation will be less.
Customers buy goods from the retail market and the Consumer Price Index (CPI) measures the change in the price of the products available in the market. CPI measures the average price paid for products and services. Apart from crude oil, prices of products, cost of production, there are many other things which play an important role in determining the retail inflation rate. At present, there are about 300 products since whose prices the retail inflation rate is decided.
In this way, inflation plays an important role in determining one’s purchasing power. When inflation increases, the prices of both goods and services increase, which reduces the purchasing power of a person and the demand for goods and services decreases. Then, their sales decrease, their production decreases, the company suffers losses, workers are laid off, employment generation decreases, etc. Due to this, economic activities slow down, and the pace of development is hampered.
Despite the lending interest rate remaining at a high level for the last few months, loan disbursement is increasing, and the pace of growth rate also remains fast. However, such a situation is an exception. HSBC India’s PMI figure was 57.5 points in May 2024, which was 58.8 points in April, while the composite PMI was 60.50 points in May 2024, which was 61.50 points in April 2024. It is clear from the mentioned data that economic activities are booming.
Inflation in India is at a worrying level despite being within the tolerance limit set by the central bank. Therefore, the Reserve Bank of India has kept the policy rates unchanged in the monetary review. The central bank is very sensitive about inflation and it wants to keep the economy strong by maintaining a balance between inflation and growth rate, so that the common man does not face any problem and the pace of development also remains fast.
Satish Singh, Ahmedabad based Senior Columnist,Views are personal
