At a time when the global economy is still recovering from the covid-19 pandemic, the rising inflation coupled with increased interest rates and slower economic growth is having detrimental effect on the economy’s resilience and financial stability. 60% of developed nations are seeing inflation above 5%, which has not been seen since the 1980s.

In April 2022, India's annual inflation rate rose to 7.79%, the highest since May 2014 and far over the maximum limit of the RBI's inflation range. For the fourth month in a row, inflation remained beyond the central bank's 2 % to 6 % tolerance ceiling.
Reasons for India's rising inflation?
Food items, edible oils and fuels have all seen significant increases in price. In April, food inflation increased to 8.38%, up from 7.68% the previous month and 1.96% the previous year, with the highest increases in oils and fats (17.28%), vegetables (15.41%), and spices (10.56%).

The main culprit is right in front of us – Fuel. The impact of higher fuel prices is having an influence on other goods and services as well. Additional upward pressure came from costs of transportation & communication (10.91%), health (7.21%), footwear (12.12%) and clothing (9.51%). Agricultural prices have also been rising driven by rise in demand as national income estimates show no fall in agricultural growth.

The domestic market is feeling the consequences of the unusually high global food costs caused by the ongoing geopolitical crisis. Global factors such as interest rate hikes by the US Federal Reserve, rising commodity prices, rising energy prices, and supply side factors caused by COVID-induced shutdowns, the war in Ukraine and China's lockdown have all filtered into India and contributed to the country's rising inflation.
Russia-Ukraine War
Europe is running out of oil and gas as a result of Russia-Ukraine War. As a result, oil prices have risen in India as well. Subsequently, the cost of transportation has increased making the goods and services more costly. Ukraine is a major supplier of Sunflower oil and fertiliser to India, which has a direct influence on Indian food costs. When oil and fertiliser costs rise, it inevitably has a cascading impact on all other prices, which the customer must finally pay.
Increase in users
According to Google's Year in Search Report 2021, the exponential growth of the internet user base has resulted in millions of new and unique searches per day over the past two years, and businesses will need to adapt in how they respond to this customer transition. As a result of the coronavirus outbreak, online first shopping experiences and direct selling brands have gained traction, according to the India arm of the American multinational technology firm.

As businesses moved online to meet customer needs, search interest in direct-to-consumer, or D2C, brands increased by 533 percent. Searches for "which brand is good" increased by 41% as Indians conducted research before making purchasing decisions. Customers searching for a brand's official store have increased by up to 80%, according to the report.
The lockdown in China along with The Russia-Ukraine war have resulted in shortages of coal for power, semiconductor chips for industries and other goods like food, oil, edible oil, construction materials. This has resulted in a scenario where demand exceeds supply, causing prices to rise.
Furthermore, the supply chain implications of China's lockdown and geopolitical tensions, will continue to pose a danger to company earnings and depress the investment climate, affecting capital goods and infrastructure/construction products output and industries that rely on vital raw materials supplied by Russia, Ukraine, or China.
Rising inflation effects
The official upper tolerance level of CPI inflation is 6% which has been breached for the past three months in a row. Rising inflation is having a rippling effect throughout the Indian economy, as seen by the RBI's decision to raise the repo rate for the first time in two years. We are expecting additional hikes in the year ahead. The rising inflation along with increased interest rate has increased the volatility in the global equity market

Concerns about what need to be implemented in order to keep the inflation under control have grown, since we all know that high inflation in one year leads to greater prices in succeeding years.
The conflict between Ukraine and Russia drove up the input prices by up to 30%, hurting profit margins. Besides high raw material costs, any increase in the interest rate will exacerbate the already high cost of doing business. Companies' borrowing costs will rise, and they have already begun passing these costs on to consumers. Interest rate-sensitive industries and weak segments would bear the brunt of the blow. Hospitality and transportation, among other industries which are still suffering from the effects of the Covid epidemic, will be hit worse than agriculture and banking, which are more robust.
The increasing interest rate will reduce demand in the housing market. Real estate developers are straining to keep prices in check, and if the centre fails to account for rising input costs, the quality of construction might suffer.
Infrastructure projects:
The cost of critical infrastructure projects in the roads, trains, and low-cost housing sectors would undoubtedly climb as steel and cement costs rise in tandem with wage increases. According to experts, the cost of new contracts might rise by 15-20%. This will limit economic development once further, causing a domino effect on the economy.
Impact on Common man:
Inflation reduces people's purchasing power in the most direct way. The common man bears the brunt of inflation since he is responsible for a household with limited purchasing power. Their interest rates on home, automobile, and other loans are rising dramatically. For savers, rates on fixed deposits will rise as well, but real interest rates will remain negative as long as inflation is greater than deposit rates.
Going forward, the rise in global commodity prices as a result of the ongoing Russia-Ukraine conflict, as well as the resulting rise in domestic inflation as a result of higher input costs being passed on across several categories of goods, is expected to have an impact on consumer demand and, as a result, hurt consumer goods output growth. Despite abundant local supplies, food inflation is expected to remain high due to spillovers from global wheat shortages.

Despite persisting global issues and increased geopolitical obstacles, RBI anticipates a broad recovery in economic activity, a normal monsoon forecast, and a restart of the investment cycle and exports to bolster domestic growth.

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