Thursday, July 30, 2026
A nuanced monetary policy lens: 25th July 2026
Economist Milton Friedman said that inflation is always a monetary phenomenon. This is the bedrock of monetary policy. Theoretically speaking, by increasing interest rates one can slow down the demand for money, which in turn slows down demand in general and thus controls inflation.
But today, inflation is of a different variety. Crude oil prices are rising, pushing up energy costs. Supplies have been cut due to the disruptions caused by war, widening the demand-supply gap. When edible oil prices increase in global markets, it is more a case of supplies being lower. Metal prices, however, have risen — demand has gone up due to the China factor, and as there are time lags between increasing demand and adjustments in supplies, higher prices prevail.
This leads to the question of whether changing interest rates can control inflation. In India, food price increase is mainly due to supply issues. At a point in time, it was argued that demand for protein-based products like pulses and meat rose sharply, leading to inflation. But more often, it is a case of lower production that causes prices to rise. This is why there is a fear of sub-normal monsoon which can lead to an increase in food prices. Clearly, a higher repo rate cannot bring down these prices.
The core inflation basket is also interesting. When prices of food in restaurants, hotels, etc. go up, it is a clear case of outlets increasing prices to make up for higher fuel prices and other inputs. Gold prices go up when global rates rise and any increase in the interest rate cannot quite reduce demand or price. Petrol and diesel prices depend on the decisions of the government and oil manufacturing companies. The repo rate, again, has little effect.
Last year, inflation rates were benign due to lower prices of agricultural products. The base effect works both ways because extremely low inflation in FY26 was due to high inflation in FY25. This will always happen. To say that inflation was conquered in FY26 would be hasty.
The other oft-cited explanation is inflationary expectation. It is argued that when inflationary expectations increase, they get built into prices and become self-fulfilling. However, if the knowledge of a tomato crop failure enters into prices today, it is the knowledge of the crop prospects that affects the prices. But for manufactured products, companies mostly do not increase prices if they expect inflation to be higher going forward, as they would examine all conditions, including demand, before taking a call.
Hence, for monetary policy action, the following points are important. First, high inflation or a trend of rising inflation posits the merit of raising rates to ensure that the extant excess demand forces drive up prices. This also covers cases of shortfall in supply.
Second, increasing the repo rate is a signalling mechanism for discretion in lending. Higher interest costs make companies factor in this component when planning any investment decision. A repo rate hike automatically feeds into all other markets. In fact, successive hikes ensure that borrowers know the future direction and adjust their plans.
Third, the repo rate change adjusts to inflation to provide the real rate, which is important when it comes to savings and investment. This is where there has been considerable debate on the ideal level. There is no rule as such. But if it is negative, there is reason to believe that savings are going to be affected, especially bank deposits. Here, policy should be forward-looking, as the real rate will make savers take a call on where to put their money. In this context, policy is most effective as it sets the contours for savings and investment.
On the other hand, when rates are lowered, the demand story gets into play. People borrow more, as do companies, which in turn pushes up demand and hence growth. The Keynesians hence have the last word when it comes to linking monetary policy with growth tendencies. Growth can be a monetary phenomenon.
Therefore, monetary policy must be nuanced and calibrated with inflation to maintain an equilibrium on the real interest rate. And this may have to be forward-looking in terms of future inflation to enable decisions.
Wednesday, July 22, 2026
Inflation pains may get worse this year: West Asia crisis, El Niño key triggers: Hindustan Times 23rd July 2026
A gradual easing of oil prices can be expected if pre-war equilibrium is restored. But, the question is whether or not producers will lower their final prices.
The outlook on prices has yo-yoed in recent months — first rising, then falling and then rising again. Crude oil prices were easing before the conflict in West Asia pushed these up again. Gold prices have hovered in the $4,000-$4,200 band per ounce, though, at that level, they reflect a multi-year uptrend. Short-term inflation forecasts moved from pessimistic to borderline sanguine before coming under the super El Nino and possible food inflation shadow. Against this backdrop, how should we look at full-year inflation?
Crude oil prices remaining high for over 100 days present the main challenge for a benign inflation print, having already entered cost calculations of companies, as reflected in the wholesale price index. This has led to an increase in prices reflected in core inflation.
A gradual easing can be expected if the pre-war equilibrium is restored. The question, however, is whether or not producers will lower their final prices. Higher oil and gas prices have worked their way into prices of pesticides, fertilisers, paints, automobiles, glass, ceramics and other products. Restaurants have hiked prices across their menus and it is unlikely that these will be lowered when fuel supplies, and thereby, prices, normalise. It will take close to three months for restoration of normal supply if a permanent peace accord is signed by the warring sides.
A similar situation can be expected for airlines, which may not be inclined to lower fares fully even if ATF prices come down — their losses due to the conflict extend beyond fuel prices, in terms of rerouting to avoid flying over conflict-affected areas, for instance.
Therefore, even when the WPI trends downwards as oil and gas prices ease, the pass-through may not happen — at least not to a commensurate degree.
On the CPI front, things will be different. The oil impact is primarily a policy decision. When crude oil prices shot up, LPG prices were raised to an extent for consumers but fuel prices remained unchanged. After a point, excise was lowered, and, following that, retail prices were increased in three stages. Therefore, the inflation impact would be largely driven by what the government and oil-marketing companies decide when Brent reverts to a lower level (the weight of fuel products in CPI is 4.8%).
Coming to gold, the metal’s price movement is reflected in the personal care category of CPI (its weight in overall CPI is 1.2%)
A similar issue lies with gold. The personal care category of CPI is being pushed up by gold (it has a 0.62% weight in overall CPI), even though the price of gold has come down. This is due to the imposition of a higher duty on precious metals. Once again, price movement here and its reflection in the overall inflation for the year will depend on the call the government takes.
All this aside, food inflation remains a worry. The monsoon was delayed and overall rainfall may record a below normal level, complicated by the predictions of super El Nino effect July onwards. Agri-regions in the rain-shadow areas will likely be affected worse. Pulses, coarse cereals, and oilseeds are the product groups most likely to get affected, which means that, against last year’s low base, the price increases will be sharper. This means food inflation could come in well above 5-6% for the year. Throw in MSP increases, and benchmark prices for the market are likely to be high.
Whether the government rolls back some of the fertiliser subsidy being offered at present and lets prices increase to an extent also needs to be seen.
Globally, transportation and freight costs have gone up and will take time to return to the earlier normal. Opec may have agreed to increase output, but restoration of damaged energy infrastructure in the Gulf States will likely take many months if not years. Energy contracts, thus, will need restructuring, depending on the terms and prices prevailing in the market.
Finally, a conscious call has to be taken internally on retail prices of fuel. During the last spell of conflict, as well as the short-lived ceasefire when crude prices fell, retail prices were left unchanged. Will this policy continue?
Looking at things as they stand today, it is likely that inflation for the full year could reach 5-5.5%, especially as food inflation rises in the second half of this fiscal.
Wednesday, July 15, 2026
Rain check for RBI: Food inflation, El Niño risks make rate cuts unlikely Buisness Standard: 16th July 2026
Monetary policy targets headline inflation, and this remains a challenge. While the weight of food products has declined in the new CPI basket, it is still at a significant 35 per cent. The fact that food inflation is above 5 per cent in both CPI and WPI data is a concern, especially as the low base effects alone would have resulted in elevated inflation numbers even under normal conditions. A new risk has emerged in the form of rainfall uncertainty, which needs to be considered while debating the repo rate.
The monsoon so far has been less than normal. As of July 14, the monsoon was 21 per cent below normal levels on a cumulative basis. Twenty-seven of the 36 meteorological divisions had lower than normal rainfall, with 19 facing a deficit of above 20 per cent. While the monsoon has arrived late, there are good chances of a pickup and a likely better spread during July and August. Hence, this may not be a worry as weather patterns have changed over the last few years.
The prevalence of El Niño in the next two months has a high probability, which can come in the way of the progress of the monsoon. Given that around 40-50 per cent of the kharif output is rain-fed (the ratio of access to irrigation varies from 20-80 per cent for various crops), the monsoon is important. In fact, more than the headline number, the spread and progress are critical in determining the crop prospects.
The heavy rains in the last 10 days in various regions have elevated the reservoir levels to around 32 per cent of capacity, but remains below last year’s level of 52 per cent. This is important as we need to have a level close to 80-90 per cent by the end of the monsoon to provide water for cattle and crops in winter — making it another factor that the RBI MPC would need to consider seriously.
As of July 10, the area under cultivation was around 48 per cent of normal, making it the lowest since 2023. This is understandable because a late arrival of rains makes farmers defer sowing. But what becomes important is the crop swapping that takes place in certain regions due to this phenomenon of delayed monsoon. The area under cultivation is lower for foodgrains, pulses, and oilseeds. Foodgrains are less of an issue as rice cultivators normally persevere with the crop due to the front-end procurement programme of the FCI. But this does not hold for pulses and oilseeds, where the prices have already shown upward tendencies. Therefore, the RBI will have to monitor the crop sowing across the spectrum as it has been observed that single crop shortfalls in oilseeds and pulses have a sharp effect on prices, and hence inflation.
The market has already signaled higher prices for oilseeds and pulses. The reason is straightforward. First, the area under cultivation is lower, and the market factors in future shortfalls. Second, as pulses and oilseeds are largely single season crops, the existing stock from last year’s production tends to get reduced with time. Late sowing means late harvest, which in turn means that existing stocks have to be pulled for that much longer. All this puts pressure on prices.
Keeping in mind all these factors on crop prospects, it stands to reason that rate cuts are out and an unchanged position can be expected. The OIS market is still talking of one or two rate hikes in the next nine months, but it may be useful for the MPC to probably signal in some way that a rate hike could be considered if the situation becomes grim considering that the crude oil crisis has once again popped up. Maybe change in stance or simple articulation.
Foreign currency deposits are arriving but with risks: Mint July 16 2026
https://www.livemint.com/opinion/online-views/leveraged-fcnr-deposits-not-risk-free-india-dollar-attracting-scheme-nris-rbi-currency-swap/amp-11784024529461.html
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