Govt ensured inflation didn’t raise its ‘dirty’ head in first term, but days ahead may be tough; here’s why

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Even as the first term of the Modi government may have ensured that prices remain in the RBI prescribed comfort zone, the days ahead can throw serious challenges.

Finance Minister Nirmala Sitharaman on Friday said that the government has succeeded in keeping ‘complete control’ over retail inflation. The government has achieved success in not allowing inflation to raise its ‘dirty’ head to cause inconvenience to the consumers, she also said while replying to a general discussion on the Union Budget 2019-20 in the Rajya Sabha. Even as the first term of the Modi government may have ensured that prices remain in the RBI prescribed comfort zone, the days ahead can throw serious challenges. Retail inflation faces upward pressure in coming months on account of seasonal factors as well as waning base effect, CARE Ratings said. “Deficit monsoons and the lower crop sowings so far this monsoon season could lead to a build up in price levels and would be critical to the inflation trajectory in the coming months,” it added.

The CSO’s data for June show the retail inflation rising to 8-month high number of 3.18 per cent as against from 3.05 per cent in May, even as it’s still in the comfort zone of the central bank. The imposition of cess on transport fuels such as petrol and diesel could result in a pass through to various commodities and impact prices, the rating agency noted.In October 2018, the retail inflation stood at 3.38 per cent.  “The RBI is likely to track the progress of monsoons and sowing before acting on its monetary policy,” it added.

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Even as the latest  rise in the prices of crude  oil has been offset by the rupee appreciation, the increase in duties and cesses on fuels introduced in the budget would have a modest first and second round impact on the retail inflation, Aditi Nayar, Princiapal Economist, ICRA said.

“The shrinking of the monsoon deficit has allayed some concerns regarding the trajectory of food prices. However, the sustainability of the hardening in crude oil prices needs to be watched. At present, we expect CPI inflation to remain comfortably below the MPC’s target of 4% during Q2 FY2020,” she added.

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