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Will A Good Monsoon Really Bring Down Inflation? - Outside View by PersonalFN

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Will A Good Monsoon Really Bring Down Inflation?
May 30, 2016

The significance of food to mankind by no means can be undermined. It is biologically know fact, that every living organism needs food to survive and grow. Hence besides clothing and shelter, food is considered to be a primary need.

As you may know, countries across the world follow a different diet. In India, the land of multi-cultural cuisines, a predominant portion of the population stick to a lacto-vegetarian diet; meaning they consume mainly vegetables and dairy products such as milk, cheese, butter, cream, yogurt, ghee, etc. but exclude eggs. Hence when prices of these products rise, household budgets go awry, leaving breadwinners and homemakers uncomfortable. And interestingly when that happens, it also becomes a political hot potato for the opposition parties.

The Consumer Price Index (CPI) inflation for April 2016 snapped the descending trend with the data coming in at 5.39% from 4.83% the month before, mainly led by food prices (due to an early summer heat wave). And over the next few months, the prices of many food items such as vegetables, pulses, sugar, and poultry products are set to rise over on contracting supply. This is notwithstanding the forecast of an above-normal southwest monsoon this year by the Indian Meteorological Department (IMD).

You see, farmers will start sowing kharif crops in June and wait for the harvest in October. Thus, in the interim, there are chances that inflation would report an uptick led by food prices.

Hard facts...

Potatoes and tomatoes, which are a kitchen staples, have already doubled in price over the year. Similarly, chickpea, the most consumed pulse in India, has risen over a quarter percentage. Sugar too is up around 35% over the year.

So, there doesn't seem to be much respite for the aam aadmi (or the common man), except that onions have stopped causing a lachrymose. It is imperative that the Government takes action against hoarders, providing relief to the aam aadmi, who indeed hope for 'acche din' (or a better tomorrow).

How would RBI handle the situation?

While an accommodative tone has been adopted in the first bi-monthly monetary statement for 2016-17, the Reserve Bank of India (RBI) Governor, Dr Raghuram Rajan is likely to do a prudent assessment of the inflation trend. The central bank recognises that hike in wages and pension of Government employees later this year, as well as the service tax rate is also likely to pose a risk to the inflation trend. Also, given that the inflation data for April has inched-up, RBI may refrain from reducing rates in the second bi-monthly monetary statement for 2016-17 (scheduled on June 7, 2016). It would prefer to observe the distribution of rainfall across the nation before turning further accommodative in its monetary policy stance.

What should you do?

During challenging times, manage your household budget effectively giving enough thought. Cut down on unnecessary expenses and be extremely disciplined. This will not only help you save, but even plan for emergencies and meet the vital financial goals you've envisioned.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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