What is Imported Inflation?
Historical Background
Key Points
9 points- 1.
Causes: The primary causes are depreciation of the domestic currency (e.g., rupee depreciation makes dollar-denominated imports costlier) and rise in international commodity prices (e.g., crude oil, gold, fertilizers, industrial metals).
- 2.
Supply Chain Disruptions: Global events leading to supply chain disruptions and scarcity can also drive up prices of imported inputs and finished goods.
- 3.
Impact on Production Costs: Increases the cost of production for industries that rely heavily on imported raw materials, components, or energy.
- 4.
Consumer Prices: Leads to higher consumer prices for imported finished goods and services, directly impacting household budgets.
- 5.
Overall Inflation: Contributes significantly to overall inflation, making it challenging for the Reserve Bank of India (RBI) to achieve its inflation target.
- 6.
Wage-Price Spiral: If not controlled, it can trigger a wage-price spiral, where rising prices lead to demands for higher wages, which further pushes up prices.
- 7.
Current Account Deficit: Can worsen the current account deficit if the import bill rises substantially due to higher prices, even if import volumes remain constant.
- 8.
Mitigation Strategies: Include exchange rate management by the RBI to prevent excessive rupee depreciation, diversifying import sources, promoting domestic production to reduce import dependence, and fiscal measures like duty cuts on essential imports.
- 9.
Monetary Policy Response: The RBI may respond with interest rate hikes to curb aggregate demand and contain secondary effects of imported inflation.
Visual Insights
Imported Inflation: Causes, Impacts & Mitigation
This mind map provides a comprehensive overview of imported inflation, detailing its primary causes, the wide-ranging impacts on the economy, and the strategies employed for its mitigation.
Imported Inflation
- ●Causes
- ●Impacts
- ●Mitigation Strategies
Recent Developments
3 developmentsIndia experienced significant imported inflation in 2022-23 due to the Russia-Ukraine conflict, leading to higher global crude oil and commodity prices, compounded by rupee depreciation.
RBI's monetary policy decisions have been heavily influenced by the need to control imported inflation to keep overall inflation within the target band.
Government has taken measures like export duties on certain goods and import duty cuts on others to manage domestic prices and mitigate imported inflationary pressures.