- The inflationary trend presently witnessed in the Indian context is showing signs of further surge with no signs of respite for the common citizens. The double-whammy in the form of the ongoing Russia-Ukraine war and the incessant lockdown in China has severely disrupted the global supply chains. Despite the international community trying to intervene and bring about a truce in the Russia-Ukraine war alongside crippling sanctions as a weapon, the war continues unabated with no signs of peace being called in the near foreseeable future. As regards India, it is yet to recover from the economic debacle of the debilitating lockdowns/restrictions courtesy of the pandemic.
PC: John Clinkard
- As a consequence, the global heat generated as well as domestic disruptions have started playing havoc on the ground affecting the common citizens no end. It was widely expected that the Reserve Bank of India (RBI) will eventually step up to address the inflationary trend. And it has stepped up now. The RBI’s monetary policy committee (MPC) recently increased its key policy interest rate, repo, by 0.5 percentage points to 4.9%. It’s the second increase in about five weeks, taking the cumulative rise in the repo to 0.9 percentage points in the current cycle of monetary tightening.
- Other highlights were a clear signal that tightening will continue longer and a sharp upward revision in the projected retail inflation in 2022-23 to 6.7%. It means RBI will fail to meet its statutory obligation to keep inflation below the upper threshold of 6% for three consecutive quarters. Further, MPC’s statement and the unanimity among its members on both the repo increase and communication mean that the central bank will henceforth prioritize inflation. A projection of 6.7% for the current year signals that there will be more rate increases in the future to rein in the second-round effects of inflation.
PC: SIDDHARTH UPASANI
- Certainly, the movement of yield on government securities indicates that the financial market expects more rate hikes. The moot point to ponder over here is where does that leave economic growth. RBI believes that there will be no impact on GDP as it has chosen to keep its forecast of 7.2% for 2022-23 unchanged. Needless to mention, that’s grossly unconvincing. The outlook for economic growth has worsened mainly on two counts. As mentioned above, the global situation is deteriorating, and the domestic context has changed significantly as well. Delving further will clear the point being discussed here.
- To speed up the process of monetary transmission, RBI mandated the introduction of external benchmarks in pricing loans in 2019. Today, about 40% of outstanding credit, particularly to retail and MSMEs is linked to external indicators. Therefore, monetary tightening will ripple out faster and act as a drag on private consumption. Going forward, fiscal policy will have to be the main support for economic growth as RBI’s sole focus will be on controlling inflation. The situation calls for realigning spending to the crown in private investment through infrastructure projects and holding up consumption through other financial measures such as subsidies and tax changes. Tough days ahead.