Review 2

by Sumesh Bhat

Consumer price inflation is at its 21 month high' read the headlines today. Coming in at 5.76%, inflation for the month of May 2016 was higher by about 0.3% from the preceding month's revised figure. The key culprit this time again is food. CPI food inflation in particular jumped to 7.55%, from 6.4% in the preceding month - led by higher vegetable prices. 

Repo rate - the rate at which the RBI lends money to the banks - currently stands at 6.5%. It has gradually been brought down from levels of 7.75% from about a year and a half ago. CPI numbers on the other hand have been quite volatile over this period. Particularly from July 2015, when inflation numbers have started moving higher. 

The RBI is targeting to keep inflation below 5%. And therefore a cut in the interest rate is unlikely to be on the cards anytime soon. That is unless of course a good monsoon gives enough buffer and has a benign impact on food prices. As an investor, you may not want to bet on the monsoon or the RBI's rate cut. But best to not discount the inflationary risk to GDP growth. A sharp up move in oil prices can only make matters worse.

The solution part would be channelizing the efforts to meet the demand~supply curve at feasible levels.