Inflation Finally at 5.88%🔻 What does it mean for you?
As the consumer inflation is lowest in 11 months, what does this mean for your wallets and the overall state of the economy
The inflation data has come and might cheer you up😬
Consumer Price Index (CPI) has dropped from 6.77% last month to 5.88% for Nov'22🔻
This is the lowest in the last 11 months🤩
What does it mean for you? Can we expect lower interest rates from RBI?
We are going to tell you something which the headlines won’t. Read on👇
1/ What is CPI?
CPI stands for the Consumer Price Index
The CPI is a measure of the average change over time in the prices paid by consumers for a basket of goods and services.
It is calculated by taking the price of a representative sample of goods and services and comparing it to a reference date or base period.
The CPI is used to measure inflation, which is the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling.
Central banks, including the Reserve Bank of India in India, often use the CPI to make decisions about monetary policy and interest rates.
In India, the CPI is calculated using a basket of 299 goods and services
2/ What all does it include?
The basket of goods and services used to calculate the CPI is designed to be representative of the purchases of a typical consumer.
It includes majorly the following items:
Household items etc.
The weights assigned to each of these categories is decided as per the Consumer Expenditure Survey of 2011-12 conducted by National Sample Survey (NSS)
3/ What is core CPI?
Core CPI is a measure of inflation that excludes certain volatile items, such as food and energy prices, which can fluctuate widely and distort the overall inflation picture.
By excluding these items, which are considered to be less stable and more subject to short-term changes, core CPI provides a more accurate measure of underlying inflation trends.
Central banks, including the Federal Reserve in the United States, often pay close attention to core CPI when making decisions about monetary policy and interest rates.
Some economists and market watchers also use core CPI as a predictor of future inflation trends.
Thus, Core CPI inflation excludes certain volatile items from the CPI basket, like fuel and food
This provides a more stable measure of inflation that is less affected by short-term fluctuations
Core inflation is still at 6.1%. RBI's tolerance is at 6%
4/ Repo rate & Inflation
Repo rate, short for repurchase rate, is the interest rate at which the central bank of a country lends money to commercial banks in the event of a shortage of funds.
It is an instrument used by central banks to regulate the supply of money in the economy, and to control inflation.
When the repo rate is increased, it becomes more expensive for banks to borrow from the central bank, which can help to reduce the money supply and curb inflation.
Conversely, when the repo rate is decreased, it becomes cheaper for banks to borrow from the central bank, which can help to increase the money supply and stimulate economic growth.
The central bank typically uses the repo rate as a tool to achieve its monetary policy goals, such as maintaining price stability and supporting economic growth.
In India, Repo rate is the rate at which RBI lends to Banks. Banks then lend it to businesses and consumers.
As we mentioned, lower the repo rate, better it is for economy.
Lower interest rates do enable more investment by businesses and more consumption by consumers.
However, if repo rates are kept too low (even below inflation) for years, it makes inflation very high in the economy.
Therefore, to tame inflation, RBI has to increase Repo Rates
RBI has raised Repo Rate from 4% in May'22 to 6.25% now in Dec'22
RBI did a commendable job in controlling inflation!
Look at the condition in the US.
Not even talking about the inflation in European Union as it might be severely impacted due to war.
5/ Will the RBI decrease Repo Rates?
Central Banks try and maintain inflation neutral interest (Repo) rates.
Inflation is now ~6% and the Repo Rate is 6.25%.
However, economists suggest that to ensure that inflation stays below the 6% mark, RBI will hike rates once more in February, 2023.
The Finance Ministry said in a Social Media Post:
”The absolute decline in prices of vegetables, ‘oils and fats’ and ‘sugar and confectionery’ contributed significantly to the reduction in food price inflation.”
For the same reason, the economists believe that it is important that the monetary policy of the RBI is not relaxed right now and a hike in repo rates can thus, be expected in February again
This will ensure that the inflation doesn’t rise again in our war against inflation.
6/ How does it impact me?
If we can keep inflation within 2-6% by Mar'23, we can expect the Repo rate hikes to halt
This will help us plan our EMIs better
Also, help businesses in projecting their cash flows & capital allocation decisions
This helps an economy grow in a sane way
What do you think?
- Will inflation cool down further?
- Or it is just a one time base effect thing?
Let me know. Write down👇
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Image source: UK India Business Council
P.S. We took support of artificial intelligence tools to write this blog including Chat-GPT :)
Very good article bro, its very infomative.
F. D rates were just increased to 6.5 % recently, so now that won't stay for long bcs of repo rate. I have to invest somewhere else😩 too much work.