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The data pertaining to inflation for the month of April suggests that the retail inflation is on the rise. Retail inflation for April came in at 5.39%. Now, this is way higher compared to 4.83% in the preceding month.
The rising retail inflation is mainly on account of increasing fuel and food prices. Talking about fuel, the price of the Indian basket for crude oil has gone up by more than 71% between February and mid-May. Previously, low oil prices helped to keep the inflation levels in check. However, a surge in the oil prices would have an adverse effect on inflation levels.
Rising oil prices in turn lead to increase in the prices of the food items because of the logistics cost involved. Further, drought has played its part too. Reservoir levels are down in many parts of the country. This has affected the sowing of crops, leading to lower production and higher prices of food items.
While the government cannot control oil prices, it can partially keep a check on food inflation. The government's discipline on minimum support prices coupled with maintaining proper demand supply balance in terms of food products ensures that the prices do not inflate.
While, the government has done a good job in balancing the demand supply balance for cereals, the same does not hold true for pulses. It could have done a better job in controlling the prices of pulses. Going forward, the government needs to fix these structural impediments to ensure low and stable inflation in the medium term.
Further, a normal rainfall as predicted by the Indian Meteorological Department (IMD) will help keep the inflation numbers in check. However, if the rain gods disappoint, there may even be a case wherein the RBI increases interest rates should inflation begin creeping upwards.
While, RBI wants to bring down the inflation number at around 4% by the first quarter of fiscal year 2018, a rise in the oil and food prices can act as a deterrent in achieving this target.
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