Highlighting the causes of inflation in India and analyse the effects of high inflation over the people and economy.

Monetary Policy statement signalled a shift in focus from reviving growth to mitigating risks

posed by inflation. Although it has kept the policy rates unchanged for now, it indicated a

possible hike in repo rates going forward.

Reasons for inflation rise

Impact on households

The high inflation has been driven by rise in prices of fuel and food items such as
cereals and vegetables.
Rising fuel and food prices not only directly impact the household budget of families
that are slowly coming out of the shadow of Covid, but also threatens to put them
under further pressure on account of the expected rise in interest rates in the economy.
A rise in interest rates, as indicated by the RBI and in line with the global trend across
central banks, will have a major impact on large section of the society that are paying
EMIs on home loans.
While the interest rate hike in India is not expected to be very sharp compared to what
has been planned by the Federal Reserve in the US, it will have a bearing on existing
loan customers.

Impact on investors

A low-interest-rate environment also impacts conservative debt investors who are
more comfortable investing in fixed deposits and other safe assets. When rates are
low, most fixed deposits have been earning an interest rate between 4.5-6% for
investors depending on tenure; however, as a result of the high inflation, the real
interest earning has been negative.

Impact on the economy

As commodities and services become more expensive, a currency unit’s buying power declines.
This has an effect on a country’s cost of living. When inflation is strong, the cost of living rises along with it, resulting in a slowdown in economic growth.
In order for spending to be encouraged and saving to be discouraged, a certain degree of inflation is essential in the economy.

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