Mixed Fortunes: Easing Inflation Offers Glimmer Amidst Rising Digital Transaction Costs for Indian Households

New Delhi, October 27, 2023 – Indian households are navigating a landscape of nuanced financial shifts this week, with a fragile sense of relief emerging from the slight deceleration of retail inflation, particularly in essential food items, even as changes in digital payment regulations threaten to add new layers to daily transaction costs. The Reserve Bank of India's (RBI) recent pronouncements and government initiatives are shaping a week of mixed economic signals for the common citizen.

Key points

• Retail inflation eased marginally to 4.87%, offering some respite primarily in food prices, which cooled to 6.30%.

• New interchange fee structures for specific wallet-to-bank account digital payments may lead to higher transaction costs for consumers and small merchants.

• The government launched the 'Pradhan Mantri Laghu Udyog Samriddhi Yojana' (PMLUSY) with a corpus of ₹50,000 crore, aiming to boost micro, small, and medium enterprises (MSMEs).

• Fuel prices remain largely stable across major cities, but global crude oil price volatility continues to be a watch point for potential future impacts.

• Interest rates on certain retail loans have seen minor upward adjustments from public and private sector banks, potentially affecting new borrowers.

Reported Detail

The latest Consumer Price Index (CPI) data released by the National Statistical Office (NSO) indicates a moderation to 4.87% in September, down from 5.02% in August. This easing, though marginal, was primarily driven by a softening in food inflation, which eased to 6.30% from 6.64% over the same period. Vegetables, edible oils, and pulses saw some price corrections, providing a much-needed breather for household budgets strained by persistent high costs over the past few months. While the headline number is encouraging, core inflation (excluding food and fuel) remains sticky, signalling underlying demand pressures.

“The slight dip in food inflation is a welcome development for the average Indian family, whose monthly grocery bills have been a significant concern,” stated Dr. Meena Sharma, Senior Economist at Pragati Institute of Economic Research. “However, this relief is delicate, influenced by seasonal factors and global commodity prices. The RBI will likely maintain a cautious stance, especially with core inflation proving stubborn, suggesting that a significant cut in interest rates isn’t immediately on the horizon.”

Simultaneously, the digital payments landscape is undergoing a significant shift. While the immensely popular Unified Payments Interface (UPI) remains free for person-to-person (P2P) and person-to-merchant (P2M) transactions from bank accounts, new guidelines concerning prepaid payment instruments (PPIs) have introduced an interchange fee of up to 1.1% for merchant transactions over ₹2,000, particularly when using wallet services linked to PPIs. This change, while primarily impacting payment service providers, has raised concerns that parts of this cost might eventually be passed on to smaller merchants and, subsequently, consumers, especially for larger everyday purchases.

Mr. Rajesh Kumar, General Secretary of the All India Bank Employees' Association, commented on the digital payment changes: “While the UPI system has democratised digital transactions, the new fee structures for certain wallet-based payments are a necessary step to ensure the sustainability of the payment ecosystem. Banks and payment companies incur costs. It’s a fine balance between free access and ensuring providers can invest in robust infrastructure. The focus remains on keeping UPI bank-to-bank transactions free, which covers the vast majority of daily payments.”

Adding another layer to the week's financial tapestry, the Union Government launched the 'Pradhan Mantri Laghu Udyog Samriddhi Yojana' (PMLUSY), a new credit guarantee scheme with an initial outlay of ₹50,000 crore. This initiative aims to provide collateral-free institutional credit to MSMEs, including street vendors, small shopkeepers, artisans, and self-help groups, thereby fostering entrepreneurship and job creation at the grassroots level. The scheme is expected to benefit over 50 lakh micro-enterprises in its first year, providing loans up to ₹10 lakh with simplified application processes and competitive interest rates.

Ms. Aarti Devi, proprietor of 'Aarti Kirana Store' in Karol Bagh, expressed cautious optimism. “Digital payments are essential for my business now, but even small charges on higher value transactions can eat into my thin margins. If these new government schemes truly make it easier to get a small loan without collateral, it could be a game-changer for people like me wanting to expand or just manage daily working capital better.”

Fuel prices, a perennial concern for Indian households due to their cascading effect on logistics and food prices, have shown relative stability over the past fortnight. Petrol and diesel prices have largely held steady across metropolitan cities, offering temporary relief. However, the global crude oil market remains volatile, with geopolitical tensions and supply-side concerns keeping prices elevated internationally, posing an ongoing risk to domestic fuel costs.

Meanwhile, several public and private sector banks have slightly adjusted their Marginal Cost of Funds Based Lending Rate (MCLR) or external benchmark rates, leading to minor upward revisions in interest rates for new retail loans, including home and auto loans. Existing borrowers on floating rates might see a marginal increase in their Equated Monthly Instalments (EMIs) or loan tenures, albeit the overall impact is contained compared to the sharper hikes witnessed earlier in the year.

Mr. Suresh Nambiar, a retired government employee from Bengaluru, reflected on the cumulative impact. “Every rupee counts when you live on a fixed income. The slight easing in vegetable prices is good, but then you hear about potential charges for digital payments, which are so convenient now. It feels like you gain a little on one side and lose a little on the other. For those like us, every government scheme needs to be truly accessible to make a real difference.”

Background

India’s economy has demonstrated resilience amidst global headwinds, yet inflation management remains a critical policy objective for the RBI. The central bank has adopted a tight monetary policy stance, increasing the repo rate by 250 basis points since May 2022 to combat price pressures. The government, on its part, has focused on supply-side interventions, buffer stock management for essential commodities, and fiscal prudence. The digital payments revolution, largely driven by UPI, has transformed India’s financial landscape, with transaction volumes hitting record highs. However, the ecosystem faces the challenge of ensuring viability for all stakeholders while maintaining affordability and accessibility for the masses. The emphasis on MSMEs through targeted credit schemes aligns with the government’s broader agenda of fostering inclusive growth and job creation, recognising their significant contribution to the GDP and employment.

What it means

For ordinary families, the coming weeks present a mixed bag of financial implications. The marginal slowdown in inflation could translate into slightly lighter grocery bills, offering a much-needed breathing space. However, vigilance will be required regarding digital payments. While UPI remains free for most common transactions, families regularly using wallet services for larger purchases (e.g., above ₹2,000) will need to be mindful of potential new costs. The new credit scheme, PMLUSY, holds significant promise for small entrepreneurs within families, potentially unlocking opportunities for business expansion or even starting new ventures, thereby improving household incomes. Stable fuel prices are a relief, but the underlying global risks necessitate careful budgeting for transportation and general commodity costs. The minor adjustments in loan interest rates might marginally increase financial commitments for new borrowers or those with floating rate loans, requiring a review of personal budgets.

Reactions

The news of easing inflation has been met with cautious optimism by consumer groups, who welcome any respite from rising living costs. Industry bodies have acknowledged the need for sustainable digital payment infrastructure, though they stress the importance of clear communication to avoid consumer confusion regarding new charges. The launch of the PMLUSY scheme has garnered praise from MSME associations and self-help groups, who see it as a crucial step towards empowering the informal sector. Political reactions have largely focused on lauding the government's economic management, with opposition parties urging more decisive action on persistent high prices for certain essential goods.

What happens next

Indian families should closely monitor upcoming inflation data, particularly concerning food prices, which remain susceptible to weather patterns and global supply chain disruptions. The implementation of the PMLUSY scheme will be crucial to watch, as its success will depend on its reach and ease of access for the intended beneficiaries. Banks and payment service providers are expected to clearly communicate any new digital payment charges to prevent ambiguity and ensure smooth adoption. The RBI’s monetary policy committee will continue to assess economic indicators, and future interest rate decisions will hinge on the sustained moderation of inflation. Meanwhile, global geopolitical developments will remain a key factor influencing international crude oil prices, which could have a direct bearing on domestic fuel costs and, consequently, the broader inflation trajectory in India. Families are advised to review their budgeting strategies, taking into account these evolving financial dynamics to secure their economic well-being.