Inflation Rise

The Retail inflation, measured by the Consumer Price Index (CPI), rose to a three-month high of 5.03% in February, according to the data released by the National Statistical Office last week.

There are various factors to it and one of them, rather worrisome, is the continuing upward trajectory in the prices of diesel and patrol.

As per the estimations, an increase of 200 has been registered in the basis points to 11.4% in February, from 9.3% the preceding month.

Diesel sells at around Rs 85 in Kashmir Valley and is the main fuel for freight carriage. It feeds into the costs of everything required to be transported.

The inflation rise in Jammu and Kashmir and elsewhere is worrisome and calls for serious and immediate interventions to address it. In December last, Reserve Bank of India (RBI) kept the benchmark repo rate unchanged. Raising interest rates had been the traditional monetary policy response to check inflation and given the fact that India is technically in a recession, the policy-makers of the RBI were not expected to use that blunt instrument.

The RBI has on the other hand vowed to stick with its ‘accommodative’ policy stance in the next fiscal year to help support economic recovery amid the covid-19 pandemic. This is a signal that inflation shall remain elevated. The RBI hopes that there could be some relief in the coming months from “prices of perishables”. As per the RBI, it “constrains monetary policy at the current juncture from using the space available to act in support of growth”.

Liquidity has been hit hard in the financial system.  The problem, as per the experts is that at a time when banks are looking to play safe and industry is reluctant to borrow, the deluge of money is winging its way back to the RBI through its reverse repo window. Banks still have surplus funds that they are deploying in the money markets where interest rates have tumbled below the reverse repo rates, raising questions about the effectiveness of the policy rates. The problem of surplus money is compounded by the fact that foreign investors have been pouring money into Indian equities and debt markets.

The faster retail inflation is indicative of prices of household items rising quickly. While inflation affects everyone, as it is often referred to, the ‘tax on the poor’ is taxing on the low-income stratum of society. Persistent high inflation pushes several items out of reach for this category of consumers. The short point is that the policy makers will have to be vigilant and address the issue by taking all the measures needed in this regard.



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