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India’s annual inflation rate for the just-concluded financial year of 2013-14 declined to five per cent, raising industry’s hope that the Reserve Bank of India (RBI) may consider a cut in the interest rate to push up economic growth.
The inflation rate, based on changes in the wholesale price index, has been hovering at double-digit levels for much of last year. This had prompted the RBI to raise the repo rate, or the rate at which the central bank lends money to banks against securities. A rise in the repo rate tends to suck out liquidity from the system, while a decline in the repo rate helps increase the availability of lendable funds for banks. Since higher liquidity tends to be inflationary, the RBI had raised the repo rate.
The decline in the inflation rate to five per cent, however, has not addressed all the concerns of the government and the RBI. Even though the headline inflation rate has declined, the inflation rate for food products, particularly for food grain and vegetables, is still ruling at over 12 per cent. In other words, the overall inflation rate has declined largely because of a softening of prices of manufactured products. While this will encourage the RBI to soften the interest rates to revive growth, the government cannot rest easy because of the double-digit food inflation rate.
Experts point out that food inflation can be brought under control by improving supply chain efficiencies. Encouraging the growth of the retail sector also can go a long way in controlling food inflation, they point out.
