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Inflation: A matter of interest

  • Published
    13th Jan, 2024

Context:

Inflation shows a slight increase, aligning with predictions. The RBI should offer forward guidance regarding the potential path of interest rates.

Retail Inflation and Consumer Food Price Index

  • Overall Retail Inflation Increase: National Statistical Office data reveals a slight uptick in retail inflation to 5.69% in December, primarily driven by higher food prices.
  • Food Inflation Surge: Consumer food price index rose to 9.53% in December, up from 8.7% in November.
  • Specific Food Categories: Inflation remains high in cereals, vegetables, pulses, sugar, and spices; uncertainty persists in outlook for items like rice, wheat, and pulses.

Industrial Production and Economic Trends

  • Industrial Production Slowdown: The National Statistical Office reports a slowdown in the industrial production index to 2.4% in November.
  • Year-to-Date Industrial Output : Despite the slowdown, industrial output for the first eight months (April-November) shows a 6.4% increase.
  • Economic Implications: The industrial production trend may impact overall economic growth and needs careful monitoring.

Monetary Policy and Future Outlook

  • Monetary Policy Committee's Focus: The MPC, in its last meeting, maintained status quo on rates, emphasizing withdrawal of accommodation for inflation alignment.
  • Divergent Views on Interest Rates: While Governor Das advocates staying the course until the 4% CPI target is reached, MPC member Jayant Varma suggests an impending need for an interest rate cut.
  • Inflation Projection and Forward Guidance: RBI projects inflation moderation from 5.2% to 4% in 2024-25; MPC should provide forward guidance amid global cues and potential rate cuts.
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