Editorial: Pulling trigger on inflation
The Reserve Bank of India’s sudden decision to hike the policy rate may have taken the market off guard but it has become inevitable to tame the soaring inflation. The decision, taken at an unscheduled meeting of the Monetary Policy Committee (MPC) of the central bank, sends a clear signal that rising inflation is going […]
The Reserve Bank of India’s sudden decision to hike the policy rate may have taken the market off guard but it has become inevitable to tame the soaring inflation. The decision, taken at an unscheduled meeting of the Monetary Policy Committee (MPC) of the central bank, sends a clear signal that rising inflation is going to be a bigger policy challenge than growth for the Indian economy. After holding off tough measures to check inflation, the RBI finally cracked the whip and hiked the repo rate by 40 basis points and the cash reserve ratio (CRR) by 50 basis points. As a result, the revised policy rate and CRR now stand at 4.4% and 4.5% respectively. While the MPC has kept the official stance of monetary policy as accommodative, it has maintained that it is being accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target. The significant upside risks to the inflation trajectory — skyrocketing fuel prices due to the ongoing war in Ukraine and the spiralling commodity prices — could have prompted the tough measure. The expectation of a sharp hike in interest rate by the United States Federal Reserve —which eventually happened hours after the RBI’s announcement — could have also played a role in hastening the process. It remains to be seen how far the optics of fighting inflation like the interest rate hikes will actually impact the country’s economic recovery process. What is certain, however, is that the burden on the common man is going to increase in the days ahead.
The increased burden on household loans is bound to put pressure on private demand. This will come as an additional headwind along with the inflation-driven squeeze on purchasing power, especially for the middle classes. The government must tame inflation and boost consumption by providing direct benefits to the vulnerable sections while continuing the heavy lifting in terms of capital spending. The annual wholesale inflation for 2021-22 was 13%, the highest since 2012-13 when it was recorded at 6.9%. The disquieting trend threatens to slow down the economic revival in the country. The World Bank has predicted that India’s GDP growth rate this year would be subdued at 8%, from its earlier projection of 8.7%, while the International Monetary Fund (IMF) has pegged the growth rate at 8.2%, instead of 9% it projected earlier. The RBI has admitted that the Indian economy is not immune to the “negative externalities’ in the wake of the Russian invasion of Ukraine and that the surge in commodity prices is already posing inflation risks. The war in Ukraine and subsequent economic sanctions against Russia have caused a rise in global prices of oil, commodities, fertilizers, foodgrains and metals, and the supply chains have been disrupted.
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