Score:
6/10
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Topper’s Copy
GS3
Economy
10 marks
Discuss the factors behind the recent decline in retail inflation and analyze its implications for monetary policy and household welfare.
Student’s Answer
Evaluation by SuperKalam
Demand of the Question
- Discuss the factors behind the recent decline in retail inflation.
- Analyze its implications for monetary policy.
- Analyze its implications for household welfare.
What you wrote:
India's recent decline in retail inflation (CPI) to an 8-year low of 1.54% in sept 2025 is primarily a supply-side phenomenon driven by food price correction, with significant ramifications for monetary policy and household welfare.
India's recent decline in retail inflation (CPI) to an 8-year low of 1.54% in sept 2025 is primarily a supply-side phenomenon driven by food price correction, with significant ramifications for monetary policy and household welfare.
Suggestions to improve:
- Could briefly define retail inflation/CPI for conceptual clarity (e.g., "Retail inflation, measured by Consumer Price Index, tracks price changes in goods and services consumed by households").
What you wrote:
Causes of Inflation Decline
[DRAWING: A flowchart showing causes of inflation decline.
- On the left side: "Core inflation remained contained at 4.2%" + "Fuel and Light inflation of 1.09%" + "GST rate rationalisation".
- In the center: "Policy Intervention" which includes "Price stabilization Fund for pulses", "Atmanirbhar Dal" + "Retail Sale of Subsidized Bharat Dal".
- An arrow points from "Policy Intervention" to the right side, which is "Food Price Deflation" -> "of 3.28% due to decline in vegetable prices".
- A downward arrow from "Food Price Deflation" points to the text: "This correction amplified by base effect and domestic output, effectively managed supply, checked hoarding and ensured lower market prices."]
Causes of Inflation Decline
[DRAWING: A flowchart showing causes of inflation decline.
- On the left side: "Core inflation remained contained at 4.2%" + "Fuel and Light inflation of 1.09%" + "GST rate rationalisation".
- In the center: "Policy Intervention" which includes "Price stabilization Fund for pulses", "Atmanirbhar Dal" + "Retail Sale of Subsidized Bharat Dal".
- An arrow points from "Policy Intervention" to the right side, which is "Food Price Deflation" -> "of 3.28% due to decline in vegetable prices".
- A downward arrow from "Food Price Deflation" points to the text: "This correction amplified by base effect and domestic output, effectively managed supply, checked hoarding and ensured lower market prices."]
Suggestions to improve:
- Could explore role of improved agricultural output (e.g., record kharif production boosting vegetable supplies and reducing seasonal price volatility)
- Could mention global commodity price trends (e.g., declining international crude oil prices contributing to lower transportation costs)
- Could discuss seasonal factors (e.g., favorable monsoon patterns improving crop yields across major producing states)
What you wrote:
Implications for Monetary Policy
The sustained decline provides RBI's MPC room to prioritize growth.
1) Rate Cuts Imminent: Low inflation opens up space for RBI to cut Repo rate from 5.5% by 25-50 bps. This is supported by the downward revision of FY26 inflation forecast to 2.5%.
2) Real Interest Rate Correction: A rate cut is necessary to prevent real interest rate to hike, which would tighten and dampen economic activity.
3) Growth Support: The policy focus can now shift to boost aggregate demand, supporting the projected FY26 GDP growth of 6.8%.
Implications for Monetary Policy
The sustained decline provides RBI's MPC room to prioritize growth.
1) Rate Cuts Imminent: Low inflation opens up space for RBI to cut Repo rate from 5.5% by 25-50 bps. This is supported by the downward revision of FY26 inflation forecast to 2.5%.
2) Real Interest Rate Correction: A rate cut is necessary to prevent real interest rate to hike, which would tighten and dampen economic activity.
3) Growth Support: The policy focus can now shift to boost aggregate demand, supporting the projected FY26 GDP growth of 6.8%.
Suggestions to improve:
- Could examine RBI's dual mandate (e.g., balancing price stability with growth support while maintaining 4±2% inflation target corridor)
- Could discuss transmission mechanism challenges (e.g., how rate cuts may face delays in reaching end borrowers through banking system)
- Could analyze external constraints (e.g., Fed policy divergence and its impact on capital flows limiting RBI's policy space)
What you wrote:
Implications for Household welfare
1) Increased purchasing power: Lower food prices translate directly into higher real income and purchasing power, offering significant relief to poor and low-income households.
2) Reduced debt burden: Potential rate cuts lead to lower EMIs on loans, easing financial stress on indebted households and encouraging credit-driven consumption.
3) Inflation Paradox: The benefits are uneven as high-income urban households still face sticky service inflation - healthcare, education, reflecting core price pressures.
Challenges Ahead
[TABLE]
| Aspect | Challenges | Way Forward |
|---|---|---|
| Structural | Fading Base effect, pushes inflation to 4%, near RBI target. | RBI must prioritize the rate cut to lower Real interest rate and stimulate credit off-take. |
| External Supply | Risk of imported inflation from volatile crude prices or 50% tariffs. Adverse Monsoon can reverse food correction. | Govt must invest in cold chain or logistics to cut 30% wastage and strengthen PSF for all volatile perishables. |
[/TABLE]
Implications for Household welfare
1) Increased purchasing power: Lower food prices translate directly into higher real income and purchasing power, offering significant relief to poor and low-income households.
2) Reduced debt burden: Potential rate cuts lead to lower EMIs on loans, easing financial stress on indebted households and encouraging credit-driven consumption.
3) Inflation Paradox: The benefits are uneven as high-income urban households still face sticky service inflation - healthcare, education, reflecting core price pressures.
Challenges Ahead
[TABLE]
| Aspect | Challenges | Way Forward |
|---|---|---|
| Structural | Fading Base effect, pushes inflation to 4%, near RBI target. | RBI must prioritize the rate cut to lower Real interest rate and stimulate credit off-take. |
| External Supply | Risk of imported inflation from volatile crude prices or 50% tariffs. Adverse Monsoon can reverse food correction. | Govt must invest in cold chain or logistics to cut 30% wastage and strengthen PSF for all volatile perishables. |
[/TABLE]
Suggestions to improve:
- Could explore rural-urban divide (e.g., rural households benefiting more from food deflation as it constitutes 45% of their consumption basket vs 28% for urban households)
- Could discuss savings behavior changes (e.g., lower inflation encouraging shift from physical assets to financial instruments)
- Could examine consumption pattern shifts (e.g., increased discretionary spending on services and durables due to food price relief)
What you wrote:
The current disinflation offers a policy window for decisive growth action. By smartly utilizing monetary easing by executing structural Supply-chain reforms, India can transition its 1.54% inflation into sustainably 6.8% GDP growth, firmly establishing economy on its path to become a global economic power.
The current disinflation offers a policy window for decisive growth action. By smartly utilizing monetary easing by executing structural Supply-chain reforms, India can transition its 1.54% inflation into sustainably 6.8% GDP growth, firmly establishing economy on its path to become a global economic power.
Suggestions to improve:
- Could strengthen by referencing international best practices (e.g., how countries like Brazil successfully used disinflationary periods for structural reforms) or SDG alignment (e.g., contributing to SDG 1 on poverty reduction through improved household purchasing power).
Excellent analytical structure with effective use of visual aids and specific data points. Strong grasp of policy interconnections, though could benefit from deeper exploration of structural factors and rural-urban differentials. Well-balanced coverage of all major demands.
Demand of the Question
- Discuss the factors behind the recent decline in retail inflation.
- Analyze its implications for monetary policy.
- Analyze its implications for household welfare.
What you wrote:
India's recent decline in retail inflation (CPI) to an 8-year low of 1.54% in sept 2025 is primarily a supply-side phenomenon driven by food price correction, with significant ramifications for monetary policy and household welfare.
India's recent decline in retail inflation (CPI) to an 8-year low of 1.54% in sept 2025 is primarily a supply-side phenomenon driven by food price correction, with significant ramifications for monetary policy and household welfare.
Suggestions to improve:
- Could briefly define retail inflation/CPI for conceptual clarity (e.g., "Retail inflation, measured by Consumer Price Index, tracks price changes in goods and services consumed by households").
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