A Cautious Approach
After three months of hardship, retail inflation finally went down to 5.02 percent in September providing a much-needed relief to consumers severely impacted by high inflation rates. As per data released by the National Statistical Office (NSO) the inflation in September last year was as high as 7.41 per cent, which has now softened mainly due to the fall of vegetable prices and relatively stable fuel prices. Simultaneously, food inflation has also declined from 9.94 per cent in August to 6.56 per cent in September, providing the common people respite from rising prices of edible items. Amongst the goals of the Reserve Bank of India (RBI) is the aim to keep inflation levels at a permissible level, in order to aid adoption of pro-growth measures. So, after the downward inflation trend, expectations are high for the steps to be taken by the Reserve Bank to ensure speedy economic growth of the country. Several economists have suggested that it is high time for the apex bank to reduce the lending rate for the sake of adequate liquidity in the market, which will bring in new investments. But a close examination of the present geo-political situation with the ongoing Russia-Ukraine war and fresh Hamas-Israel conflict, such a decision may be termed unwise as the future seems uncertain. Thus, instead of eyeing new investments, it would be appropriate to keep the wheel of the economy moving without being too ambitious.
If the Hamas-Israel conflict escalates further, it will definitely push oil prices upwards and will upset all economic activity around the world. There are indications that the US may soon impose sanctions on Iran for being soft towards Hamas, a step that will disturb the present supply chain. Brent crude price has already reached $89 per barrel since Hamas launched the offensive on Israel on October 7, from $86 per barrel. It will further go up if US forces Iran to cut down its daily oil production of 1.3 million barrels per day by imposing sanctions. In such a situation, to keep energy prices at the present level, consultations are going on at different levels to find a way out of the crisis. As long as crude oil price remains volatile, it will be difficult for RBI to cut interest rates to provide a breather to hence and it may choose to wait till the situation normalises. In this context, RBI will also have to be mindful about the El Nino effect as scientists are apprehensive that the said effect will disrupt the production of Rabi crops. Inflation in pulses and cereals that are known for daily use still remain high. Thus, notwithstanding the easing of inflation rate, it is time to remain cautious and calculative.