Interest rates

Inflation is falling, what will happen to interest rates? Here’s what you need to know about the economy right now

Countries all over the world are grappling with the problem of high prices. From developed economies like the United States and the United Kingdom to developing countries like Indonesia and Brazil, inflation has become one of the main sources of concern for policymakers. India is no different. Inflation in India was high before the pandemic and has remained so since.

So what does the latest data show?

Government data released a few days ago showed that inflation fell to its lowest level in three months 6.77% in October. Before that, inflation stood at 7.04% in the second quarter (July-September), compared to 7.28% in the first quarter (April-June).

While this trend suggests that inflation may have peaked, it should be noted that this is the 10th consecutive month that inflation has remained above the upper threshold of the inflation targeting framework of the Reserve Bank of India (RBI). The RBI is mandated to keep inflation at 4% (plus/minus 2%).

Part of October’s decline can be attributed to lower food inflation. The consumer food price index fell to 7.01% in October from 8.6% in September.

However, food and fuel prices tend to be extremely volatile. Their sharp swings can cause huge volatility in overall inflation readings. So analysts also tend to take a closer look at core inflation, which is basically a measure of inflation that excludes food and fuel.

The latest data shows that core inflation remains uncomfortably high. According to the ICRA’s estimate, core inflation stood at 6.5% in October. This is the fifth month in a row that core inflation has remained above the 6% mark.

According to Nomura, “companies have continued to pass on rising input costs to consumers, and the reopening of the service sector has added to price pressures.”

This indicates that even though the headline inflation figure has come down, price pressures continue to linger in the economy.

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What do the different inflation projections indicate?

At the end monetary policy committee (MPC), the RBI had forecast inflation of 6.5% in October-December. Thereafter, he expects inflation to fall to 5.8% in the fourth quarter (January-March) and then to 5.0% in the first quarter (April-June) of the next fiscal year (2023-24). ).

However, others differ in their assessments. For instance, as shown in this articlegovernment officials believe that ending the fiscal year (March 2023) with inflation at 6.5% is a “reasonable expectation”.

On the other hand, Nomura analysts expect inflation of 6.6% in October-December, falling slightly thereafter to 6.3% in January-March.

These inflation projections are important because they determine how policymakers will react.

So what will policy makers do now?

So far, to tackle high inflation, the RBI’s monetary policy committee has raised the interest rate from 4% to 5.9%. This has resulted in higher interest rates on loans for both individuals and businesses.

Now, as inflation continues to remain above the upper threshold of the inflation targeting framework, some analysts expect the RBI to continue raising interest rates to fight inflation.

However, others think that since it takes time for interest rate hikes to have an impact on inflation, and considering that inflation may have peaked, it would be wise to make a pause at this point and wait to see the path of inflation for a while.

This debate is also taking place within the MPC. Jayanth Varma, which is a member of the MPC, said it preferred not to raise rates beyond 6%. But other members of the committee seem more inclined to raise interest rates further.

Which view will prevail and whether or not interest rates will be raised further will not be known until the next committee meeting in the first week of December.