- Economies around the world are suffering to recover from the harrowing experiences of the pandemic-induced challenges and the subsequent effects of the ongoing conflict between Russia and Ukraine are known facts. World leaders are grappling with crisis after crisis to not only insulate their respective citizens from further economic challenges but also ensure ease of living by absorbing future shocks as well. The inflationary trends witnessed around the world courtesy geopolitical fallout of lockdowns and conflicts have rendered the citizens desperately seeking out remedies. The Indian government too undertook several fiscal measures to absorb economic shocks, and the RBI did essay a significant role in aiding those efforts.
PC: Sarah Zaaimi
- We know how the central bank stepped in to cushion the rising commodity prices, including the all-important oil and gas, by raising bank interest rates over the last few months. Common citizens were in the grip of multiple challenges and hoped some respite will be underway sooner than later. The economy is finally appearing to be hopeful of recovery owing to result-yielding measures initiated by the stakeholders. It’s heartening to see retail inflation, measured by the consumer price index (CPI), in November was 5.9%, the first time since January that it dropped below 6%, the upper end of the tolerance band that the Government of India set for RBI’s flexible inflation targeting regime. Some welcome news amid dark clouds of economic challenges.
- This is a positive development. It will ease pressure on household budgets. On the other hand, industrial output data for October shrunk by 4% about the previous year. It suggests that a combination of a weak global economic environment and hardening domestic interest rates is affecting aggregate demand. But parsing the CPI data will be hard to draw any conclusion on whether the decline will be durable. Mind you, a sharp fall in vegetable prices brought down the growth in the food price index to 4.7% in November from over 7% the previous month. Consequently, the headline inflation dropped. Nonetheless, core inflation, which represents the rise in prices after removing food and fuel, remains sticky at around 6%.
PC: Jonny Lupsha
- The headline inflation’s drop is mainly on account of events outside RBI’s control. This raises the question: What next for monetary policy? Let’s look at industrial output data to answer this question. Manufacturing shrunk in October by 5.6%. Also, consumer non-durables contracted 13.4%, the fourth successive month of weak performance. Sectors such as textiles and pharmaceuticals recorded a decline in output in October. FMCG sales fell by 0.5% in October despite festival-driven spending. Thus, RBI should reconsider its monetary tightening policy that began seven months ago. The current spell of inflation is mainly driven by supply-side factors. Needless to mention, RBI needs to pause rate hikes as the measure has served its purpose.
