NEW DELHI: For the past few months, India has experienced steady inflation, which has a number of causes, including rising food and energy prices, among others. However, the most important factor contributing to it is the dramatic decline in the value of the rupee against the dollar.
Due to higher food prices, India's retail inflation increased from 6.71 percent in July to 7 percent in August. In reality, the Reserve Bank of India (RBI) tolerance level of 6 percent for retail inflation has been exceeded for eight consecutive months.
Retail inflation has increased as a result of a rise in food costs, as shown by the fact that the inflation rate for the food basket increased to 7.62 percent in August from 6.69 percent in July and more than doubled from 3.11 percent in August 2021.
The price of crude oil had reached USD 130 per barrel earlier this year. However, it dropped to less than USD 85 per barrel in September. But now that OPEC+, the coalition of oil-producing countries, has resolved to reduce oil production, they may increase once more.
Inflation in India is directly impacted by rising oil costs. The fact that India imports more than 85 percent of its oil needs can be used to determine this. Imports will increase as crude oil prices start to rise, widening the current account deficit in the process (CAD).
A growing CAD will make the rupee even weaker since the nation will be forced to exchange its currency for dollars in order to cover the deficit. Inflation in India has been fueled by a weak currency.
On September 30, the RBI made the decision to raise the repo rate by 50 basis points to 5.4 percent and concentrate on removing accommodations in order to keep inflation within acceptable bounds.
Since May of this year, the RBI has increased repo rates in an effort to curb inflation. The central bank had also kept its 6.7 percent prediction for retail inflation for the current fiscal year last week. On September 30, the RBI's Monetary Policy Committee (MPC) noted that through the first three quarters of 2022–2023, inflation is expected to remain over the upper tolerance level of 6 percent.
The MPC had determined that additional calibrated monetary policy action is required to keep retail inflation within tolerance limits in light of the growing level of inflation.
The international situation has gotten worse as supply chain interruptions have fueled price increases as a result of tightening monetary policies around the world and the ongoing conflict between Russia and Ukraine.
Resultantly, the likelihood of a worldwide recession has increased due to the current circumstances. The stock markets have also been influenced by this, as India has had significant portfolio outflows totaling USD 13.3 billion in the current fiscal year.
Inflation in India has been caused by the impact of volatile international markets on domestic stock and currency markets.
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