New Delhi: Retail inflation in India reached the all time low of approximately 0.25 percent in October generating a big debate in the financial market on whether the Reserve Bank of India would finally lower the repo rate. The drop in inflation came as a shock to many since the figure has not been recorded in many years. Numerous significant factors coincided simultaneously, and they forced the inflation number to its lowest level.
The cut in the GST rates on many products was one of the major causes of the abrupt downfall. The lowering of GST by the government means that companies and shops will lower prices. Due to the effect of these tax cuts, prices of many commodities reduced in October. Applying these GST cuts, economists reckon that it is not until the following month that the full impact will be experienced in terms of these cuts as businesses usually take a certain time to adjust their prices. This implies that inflation can remain low in the near future.
How Inflation Is Really Calculate
The other cause was what was known as the base effect. The calculation of inflation is seen through the comparison of the current prices with the corresponding prices of the same month of the previous year. The prices in October last year were very high and therefore when compared with the prices this year the percentage difference was naturally low. This mathematical impact contributed significantly to the reduction in the overall number of inflation. It also touched on the inflation in the food prices which even dropped to negative inflation implying that, most food products were cheaper than they were last year. This base effect will however not remain favourable at all times. Since December and January, the base effect can begin to increase the inflation again since the prices of last year will not be as high.
Although most things became less expensive, not all things favored the decline in the inflation. During the period, prices of Gold and silver soared. These goods also form part of the consumer price index basket and the increase in prices of these goods also increased the inflation figure a little. Economists remarked that in case the sharp increase in gold and silver had not occurred, the figure of inflation in October would have been even smaller, even to get into further negative number.
Since the inflation has reduced significantly compared to the current level of 4 percent set by the Reserve Bank of India, it is now making people in the financial market anticipate the RBI to think about reducing the interests. The Monetary Policy Committee of the RBI is also due to meet in early December and most experts in the markets are of the view that a rate cut can be discussed. Reduction in the repo would lower the cost of loans and this would provide additional boost to the economy. Nevertheless, the RBI does not make decisions basing on the inflation level in a month. It also examines economic development, credit situation, and risks ahead.
According to some experts, the RBI ought to leverage on the low inflation and reduce interest rates in the near future as this would stimulate further spending and investment. Other professionals believe that the RBI ought to take caution. According to them, the decline in inflation is largely due to short term factors like reduction in GSTs and the base effect. They caution that when these short-term aspects have disappeared, inflation may increase once more. They also tell that India is seeing good growth in its economy and lowering the rates prematurely would cause financial imbalances.
The low inflation rate is a record-low, which creates excitement and hope, however, it raises significant questions. Is the decline in prices here to stay? Or is it merely a temporary decline which will soon be turned about? The decision will determine the next move of the RBI. December meeting is now the center of attention where the central bank has to walk the fine line between growth, inflation and stability before taking its next step.
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