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
- Fuel price rise
- Russia- Ukraine conflict
- Supply side crunch due to pandemic
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.
How to structure
- Give a brief intro about inflation in India
- Give the causes of inflation in India
- Analyse the effects of high inflation over people and economy
- Suggest way forward