Explained: Why CPI inflation is rising, its impact on interest rateshttps://indianexpress.com/article/explained/explained-why-cpi-inflation-is-rising-its-impact-on-interest-rates-5726556/

Explained: Why CPI inflation is rising, its impact on interest rates

Despite rising CPI inflation, analysts expect the Reserve Bank of India to cut repo rate – the rate at which it lends short-term funds to banks – as inflation remains within the RBI's target of 4 per cent even as growth of the Indian economy has been slowing down.

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Rising prices in the food basket, as well as jump in fuel prices, are contributing to the rising inflation.

Retail inflation rose to a six-month high of 2.92 per cent in April due to a spike in food prices, according to data the Central Statistics Office on Monday. The Consumer Price Index-based (CPI) inflation was at 2.86 per cent in the previous month and 4.58 per cent in April 2018. CPI inflation in April is the highest since October 2018 when the rate was 3.38 per cent.

Why is CPI inflation rising?

Rising prices in the food basket, as well as jump in fuel prices, are contributing to the rising inflation. Rating agency Crisil expects retail inflation to rise by 60 basis points to 4 per cent this fiscal from 3.4 per cent in 2018-19. Within CPI inflation, food inflation is expected to rise in the current year, as last two months witnessed rise in prices of many farm commodities, mainly due to drought in large parts of western and southern India, coupled with an early and harsher-than-usual summer. From September 2016 to March 2019, consumer food inflation has ruled below general retail inflation, averaging a mere 1.3 per cent year-on-year during this period, as against 3.6 per cent for the latter.

What is the impact on interest rates?

Despite rising CPI inflation, analysts expect the Reserve Bank of India to cut repo rate – the rate at which it lends short-term funds to banks – as inflation remains within the RBI’s target of 4 per cent even as growth of the Indian economy has been slowing down.