'Normal monsoon, rate cuts key to bring down inflation by year end'

New Delhi: A combination of normal rainfalls aiding bumper agriculture output and the Reserve Bank of India (RBI) further hiking interest rates to cut easy money in the system hold key to bringing down multi-year high inflation triggered by surging food and fuel prices, economists said.

Although the government has room to further reduce excise duty on petroleum products to contain inflation from the fiscal side, emphasis will be on monetary policy to control price pressures, they added.

While retail inflation rose 7.04 per cent in May year-on-year, slightly down from 95-month high of 7.79 per cent in April, wholesale or WPI inflation rose to a record high of 15.88 per cent in May. Three-fourth of the price rise is coming from food items and a normal monsoon will help cool it down as it will boost production and replenish stockpiles.

The RBI has already raised interest rates by 90 basis points after inflation remained above its 2-6 per cent target band for a fifth straight month and is expected to hike interest rates by another 80 bps, they said. For the common man, the price hike is drilling a hole in pocket.

Edible oil prices, which had been a major factor contributing to the inflation, have started to ease a bit with leading players announcing some reduction.

"Petrol and diesel have become expensive but, in comparison, cab fares have not been raised that much. We have to pay cab companies also. We are left with quite a little," Sukhwinder Singh, a 47-year-old cab driver said. A 40-year old vegetable seller said managing two meals a day has become difficult as people opt for home deliveries rather than buying from vegetable vendors. "Medicines are becoming expensive. We cannot even afford to fall sick these days."

Economic affairs secretary Ajay Seth on June 16 said inflation in India is mainly because of high energy and food prices and hoped that it would moderate in the coming months. "We are all aware that summer months are difficult months in terms of vegetables and other items," he said. "High crude prices are certainly a challenge and whatever measures are needed and feasible are being taken."

S&P Global Ratings economist Vishrut Rana said higher global commodity prices are a key driving factor for inflation and the outlook for food inflation, which has a heavy weightage in the overall CPI basket, will depend on the monsoon sufficient rains will help agricultural produce and help rein in prices.

"There are some additional policy options for addressing broader price pressures such as reduced excise duties, lower value-added taxes, or direct subsidies on agricultural produce, but the emphasis for now is likely to be on monetary policy. We expect further 75 basis points rate increases this year. The tighter monetary policy will help to slow rising inflation," Rana said.

India Ratings & Research principal economist Sunil Sinha said India being a net commodity importer can do very little about it. However to soften the impact, import duty cut and subsidy cut is the way out. But these have their own limits and cannot fully offset the impact of imported inflation which besides high prices also seeps into the economy via rupee depreciation.

India Ratings and Research expects another 50-75 bps hike in the reminder of FY23, he added.

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