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Retail Inflation cools down, slower rate hikes ahead?

According to data released on August 12, the Retail Inflation rate in the Indian economy slowed down from 7.01 per cent in June 2022 to 6.6 per cent in July.

Even though the inflation rates are hovering above the 6% threshold set by the Reserve Bank of India (RBI), economists suggest that the aggressiveness of interest rate hikes would possibly come down in upcoming meetings of the MPC.

The Monetary Policy Committee of RBI is the body of experts which decides upon monetary policy decisions in the economy. MPC is the body which decides whether benchmark interest rates such as Repo Rate and Reserve Repo Rate should go up or down according to the economic situation. The decisions of MPC are mainly influenced by the level of inflation in the economy.

Due to the post-pandemic economic crisis and Russia Ukraine crisis, which began in February, the national economy has been suffering from an increased inflation rate for the past few months.

Since May, Monetary Policy Committee has hiked the repo rate by 140 basis points (1.4%) in three steps. This was done to suppress the negative impacts of global inflationary tendencies on the Indian economy. Various major economies in Europe and North America witnessed inflation rates skyrocketing due to increased fuel prices.

The increase in the price of crude oil in the international market and continuing crisis in the supply chain sector heavily impacted upon the prices of commodities in the country.

The 6.7% retail inflation, which is calculated by Consumer Price Index (CPI), is the lowest rate in the last 5 months.

Along with retail inflation, the core inflation rate in the economy cooled down from 6% in June to 5.8% in July. Core Inflation is the rate of inflation without adding prices of food and fuel.

Region-wise, inflation in rural and urban areas also came down to 6.8% and 6.4% respectively in July.

According to Rahul Bajoria, who is a chief economist at Barclays, they expect two more rate hikes of 25 basis points each, in upcoming meetings of the monetary policy committee in September and December. Such a move could take the rate repo rate to 5.9%.

Upasna Bhardwaj, a chief economist at Kotak Mahindra Bank, said that the recent data are in line with the expectations of the market. According to Upasna Bhardwaj, inflation is expected to hover above the 6% mark of RBI until January 2023. She also added that the repo rate would be hiked to 6% by December and then RBI would shift to a neutral policy with no hikes or depreciations.

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