MC Explains | August CPI at 7%; how high inflation impacts common man?

(Representative image: AP Photo)

Retail inflation returned to the 7 percent levels in August from 6.7 percent a month back, triggered by a spike in the prices of food items, including vegetables, cereals and pulses. It is now fairly certain that the consumer price index (CPI) will average above 6 percent in the September quarter that will make three consecutive quarters of inflation breaching the target. The Monetary Policy Committee (MPC) of the Reserve Bank of India has a mandate to keep inflation within the 2-6 percent band.

Another rate hike on the cards?

The reversal in August retail inflation number after the easing seen in July reaffirms another RBI rate hike in September. Most economists expect the MPC to hike rates by 50 bps in the September 28-30 policy meet in view of the latest inflation numbers. One basis point is one hundredth of a percentage point. “This high inflation will work in favour of more aggression from the RBI in terms of hiking the repo rate,” said Madan Sabnavis, Bank of Baroda chief economist in a note after the release of the inflation print.

“We believe the RBI is likely to raise rates in the September policy and it could be a close call between 35 and 50 basis points. Beyond September, we are penciling in a minimal and token rate increase as inflation is likely fall in a jiffy in H2FY23,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India, in another note.

Adity Nayar, chief economist of Icra, too bets on a 50-bps hike later this month. “We now foresee a higher likelihood that the MPC will stick to the new normal rate hike of 50 bps in its September meeting,” said Nayar in a note on Monday evening. The MPC has raised the repo rate by 140 basis points to 5.4 percent over the last four months.

Inflation- the real villain!

After ignoring the threat of high inflation for too long in search for growth, there is now a sense of urgency among the MPC members with respect to the inflation fight. The minutes of the MPC meeting held on August 3-5 clearly outline the concerns among the committee members on a persistently high inflation. High inflation is the real enemy in an economy as it severely hurts the common man, particularly the poor households.

“Although inflation seems to have peaked, it is still unconscionably high," Deputy Governor Michael Patra said in the minutes. "Risks to the trajectory of inflation in the form of currency depreciation, seasonal pressures and the monsoon’s uneven progress could upend the moderation in momentum recently recorded."

External member Jayanth Varma also expressed his concerns over rising price pressures, stating that inflation is “unacceptably” high.

Coming to the most critical question- what will another rate hike mean for the common man?

There are two ways high inflation touches the common man's life.

One, by directly impacting their ability to purchase goods and services that are now costlier than before while their income levels remains the same. The prices of food items, including vegetables, pulses haves shot up in recent times which will force poor households to cut short their purchases. The same is true for services. When customers cut short their purchases, small businesses get impacted and, in turn, the broader economic recovery slows down. This will kickstart a vicious circle of high inflation-slow growth in the economy. That's a bad news.

Two, undoubtedly, interest rates are set to go up at the end-consumer level further. This is both good and bad for the common man. While borrowers will suffer, depositors or savers will stand to benefit. Those who have taken home, auto loans or plan to borrow will have to pay higher interest. However, people with money saved in fixed deposits will earn higher interest as banks up the rates.

How long the interest rates will go up? The answer depends on how long high inflation will last in the economy.

At this point it looks like, the RBI’s aggressive rate hikes approach will lose steam once inflation cools down to 5 percent levels likely early next fiscal year. But, that’s only a possibility. Predictions have gone wrong before. Hard data will tell the story.