People have got a big relief on the inflation front. This is the first time in five years that the Consumer Price Index (CPI) based retail inflation rate has come below the RBI’s target of four percent. In such a situation, experts say that this fall in inflation rate has further increased the hope of a cut in the key interest rate (Repo Rate). If the RBI cuts it, then common people can get relief in their monthly installments.
The government has given the Reserve Bank the responsibility of keeping the retail inflation at 4 percent with a variation of 2 percent. While deciding the policy rate in the monetary policy review, the Reserve Bank also looks at the retail inflation data along with many economic indicators of the country. If there is an increase in it, it decides to increase the rates, whereas if there is a continuous decline, it decides to reduce the rates.
Cuts possible in October
It is believed that after the continuous softening of retail inflation, RBI may cut the repo rate. The Reserve Bank will review the policy rates in October 2024, then there may be relief from expensive EMIs. On August 8, 2024, RBI had decided to retain the repo rate at 6.5 percent for the ninth time in the monetary review. There has been no change in the repo rate since February 2023. Experts say that in such a situation, there will be some pressure on RBI to cut rates in the next meeting.
Estimate of cuts twice this financial year
Rating agency Crisil has predicted in its report that RBI may start cutting repo rate in October. The reason for this is that food inflation is expected to come down due to better monsoon and higher crop sowing compared to last year. The agency has also expressed the hope that RBI may cut interest rates twice during the current financial year.
According to reports, the European Central Bank (ECB) and the Bank of England (BOE) have started cutting their interest rates. The Bank of Japan (BOJ) has raised its interest rates and the US Federal Reserve (FED) is expected to cut rates in September.
RBI had expressed concern about inflation rate
While reviewing the monetary policy on August 8, the Reserve Bank had also expressed concern about inflation. The bank had estimated that the inflation rate could be 4.4 percent in the current financial year and it would be around 4.5 in the second quarter of the financial year. Regarding inflation, the RBI had even said that the impact of the increased prices of milk and mobile tariff on inflation will also be studied. But an unexpectedly large decline has been seen in July. In such a situation, if this trend of reduction in prices continues for the next few months, then the central bank may consider changing the policy rates.
The relationship between inflation and interest rates
According to economic experts, when the loan is cheap, people spend freely by taking loan because of the low EMI. Cheap loan increases the purchasing power of consumers. On the other hand, when the loan is expensive, people spend very cautiously. Also, companies also do not spend much on expansion. This reduces inflation along with the softening of demand.
Inflation situation during July
Rural City Average
Retail inflation 4.10 2.98 3.54
Food inflation 5.89 4.63 5.42
Inflation situation during June
Rural City Average
Retail inflation 5.66 4.39 5.08
Food inflation 9.15 9.6 9.36
