In perfect balance

To strike a balance between inflation and development, the Monetary Policy Committee has kept the repo rate unchanged at 6.5 per cent in the latest monetary review. Earlier, the repo rate was increased in February 2023.

The Reserve Bank mainly tries to fight inflation by increasing the repo rate. When the repo rate is high, banks get loans from the Reserve Bank at a higher rate, due to which banks also give loans to customers at a higher rate. By doing this, the liquidity of money in the economy decreases and because of lack of money in the pockets of the people, the demand for goods decreases. Furthermore, due to the high price of goods and products, their sale decreases, owing to which, a decline in inflation is recorded.

Similarly, in case of slowdown in the economy, efforts are made to increase the liquidity of money in the market to accelerate the developmental work, and for this also, the repo rate is cut, so that banks get loans at cheaper rates from the Reserve Bank, and after getting loans at lower rates, the banks also give loans to the customers at tawdrier rates. At present, the inflation rate remains a matter of concern for the government and the Reserve Bank of India.

According to Care Edge Rating, despite the loan rate not softening, the loan growth rate had been around 16 per cent in the financial year 2023-24 and it is estimated to be between 14 to 14.5 per cent in the financial year 2024-25. Such a situation is very positive for the Indian economy. However, it can be called an exceptional situation. Anyway, due to the pace of lending remaining fast, both economic activities and growth rate are picking up. For this reason, the Reserve Bank of India has increased its growth forecast for the financial year 2025 from 7 per cent to 7.2 per cent.

The GDP growth rate in the fourth quarter of FY 2023-2024 was 7.8, while it was 6.1 per cent in the same quarter last year. At the same time, the GDP growth rate in the financial year 2023-24 was 8.2 per cent, which is 1.2 per cent more than the estimate of the Reserve Bank of India; the RBI had estimated the GDP growth rate to be 7 per cent during the financial year 2023-24. Here, it is important to mention that, the GDP growth rate was 7 per cent in the last financial year. According to the Ministry of Statistics, the growth rate remained high during the period under review due to strong performance in the manufacturing and mining sectors. The manufacturing sector grew by 9.9 per cent, which was minus 2.2 per cent in the financial year 2022-23. Similarly, the mining sector grew at the rate of 7.1 per cent during the financial year 2023-24, which was 1.9 per cent in the financial year 2022-23. It is noteworthy that the manufacturing sector plays an important role in employment generation.

Retail inflation is still a matter of concern and it is estimated that there will not be much softening in retail inflation in summer. However, there may be some softening in it in the winter season. Although the Reserve Bank of India has projected inflation to be 4.5 per cent in the financial year 2025, this level is not enough to take a decisive decision for development. Wholesale inflation rose to a 15-month high of 2.61 per cent in May, while it was 3.85 in February 2023. At the same time, it was 1.26 per cent in April 2024, which was the highest level in 13 months. It was 0.53 in March 2024 and 0.20 per cent in February 2024.

The National Statistical Office (NSO) released the retail inflation data on June 12, 2024, according to which retail inflation was 4.75 per cent in May, which was the lowest level in 12 months. There was some reduction in retail inflation in the month of April, but it was slightly higher than the month of May at 4.83 per cent. Retail inflation was 4.81 per cent in June 2023, while it was 4.44 per cent in July 2023.

Inflation is directly related to purchasing power. For example, if the inflation rate is 6 per cent, then the value of Rs 100 earned will be only Rs 94. Therefore, investors should invest according to the level of inflation, otherwise they will get less returns.

The rise and fall of inflation depend on the demand and supply of products. If people have more money, they will buy more products, increasing demand. If the supply does not meet the demand, the prices of products will increase. In this way, the market gets caught in a vicious cycle of inflation. Excessive money flow in the market or a shortage of products causes inflation. On the other hand, if demand is low and supply is high, inflation will be less.

Customers buy goods from the retail market, and the Consumer Price Index (CPI) measures changes in the prices of products available in the market. CPI measures the average price paid for products and services. Besides crude oil prices and production costs, many other factors play an important role in determining the retail inflation rate. At present, the retail inflation rate is determined by the prices of about 300 products.

Inflation plays an important role in determining one's purchasing power. When inflation increases, the prices of goods and services rise, reducing a person's purchasing power and decreasing the demand for goods and services. Consequently, sales decrease, production declines, companies suffer losses, workers are laid off, and employment generation decreases. This causes economic activities to slow down and hampers the pace of development.

Despite the lending interest rate remaining high for the last few months, loan disbursement is increasing, and the growth rate remains fast. However, such a situation is an exception. HSBC India's PMI figure was 57.5 points in May 2024, down from 58.8 points in April, while the composite PMI was 60.5 points in May 2024, down from 61.5 points in April 2024. It is clear from this data that economic activities are booming.

Inflation in India is at a worrying level despite being within the tolerance limit set by the central bank. Therefore, the Reserve Bank of India has kept policy rates unchanged. The central bank is very sensitive about inflation and aims to keep the economy strong by maintaining a balance between inflation and growth so that the common man does not face any problems and the pace of development remains fast.

Views expressed are personal