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Home >Opinion >Columns >RBI should return to its dharma of taming inflation

What goes up must come down, sang Blood Sweat & Tears, the 1960s’ American music band, popular with this columnist’s generation. Presumably, that’s what the Reserve Bank of India’s (RBI) monetary policy committee (MPC) members, most of whom belong to the same generation, are also betting. Hence, their decision to ‘look through’ the sustained rise in prices through much of last year.

Wednesday’s release of the consumer-price inflation number for April 2021 (4.3%) might seem to validate their decision. But there are many reasons why the MPC should think long, and hard, again. To start with, the April print carries little validity since the base for comparison (April 2020) has been rubbished by RBI in the past on the grounds that it suffers from numerous infirmities, as it relates to the first month of the lockdown.

To be sure, some things will not change, gravity being one. What goes up must come down. That is true of prices (read inflation) as well. Through a combination of the base effect (high level of inflation in the previous comparable period), belated but inevitable monetary policy action and a fall in demand that more than offsets the disruption in supply, inflation will come down. Eventually! But that is small consolation for a central bank charged with the mandate of maintaining price stability. Or government.

The reason is that before inflation comes down, it brings untold misery to the public at large. And when it finally does come down, it is likely to bring down a host of other things along with it, including possibly, the government. There are few things that the Indian electorate is more intolerant and unforgiving of as inflation. Both in the 1980 Lok Sabha elections and the 1998 Delhi assembly polls, it was a sharp rise in onion prices that toppled ruling governments.

All governments fear inflation. Rightly so. In a country where close to 20% of the population lives below the poverty line and food is a major item of their consumption basket, any rise in inflation, especially food inflation, hurts the poor. Disproportionately. Add to that the distress caused by job losses on account of the pandemic, and this time round, the pain is likely to be magnified many times over.

Moreover, globally, commodity prices are already on the rise. After a decade of low inflation, inflationary pressures are rising almost exponentially, with inflationary expectations in the US touching a decadal high in April 2021. Not without reason, it would seem, as borne out by 12 May’s inflation print of 4.2%, America’s highest in 12 years. In the words of noted investor Warren Buffett, the US is “seeing very substantial inflation".

Part of the reason is excessive easing of US monetary and fiscal policies. The US Federal Reserve has shifted its sights from a target inflation of 2% to moderately-above 2% over the medium term. “We understand well the lessons of the high inflation experience in the 1960s and 1970s, and the burdens that experience created for all Americans," said Fed Chair Jerome Powell recently, adding, “We do not anticipate inflation pressures of that type, but we have the tools to address such pressures if they do arise."

Do they? Or is that just another instance of central bank grandstanding? Of hubris? After all, it was not so long ago that his predecessor, the redoubtable Janet Yellen, now US Treasury secretary, admitted that the Fed didn’t quite understand inflation. Rising US inflation has huge implications for countries like India that are at the receiving end of US policies.

As the US economy recovers, the dollar strengthens and US interest rates rise, the rupee is bound to weaken in response, adding to inflationary pressures here. Monetary policy acts with long and indeterminate lags. Far from spurring credit offtake through low interest rates, often kept artificially low by liberal market intervention and pep talk from none less than RBI governor Shaktikanta Das, excess liquidity has spilled over into price pressures in India. Wholesale price inflation at 7.4% (March 2021) was the highest in 8 years, while it would be naïve to take any solace from the latest consumer price index number.

Posterity may give RBI full marks for doing its bit to keep the wheels of our economy moving, even as the government dragged its feet. But it’s likely to be far more unforgiving of its failure to shift gear in the face of mounting evidence that it was being hoist by its own petard. Sure, supply disruptions played a part. But when inflation was breaching the upper end of RBI’s target band for months on end, the message should have been clear. Retaining an explicit, time-bound forward guidance (it was finally changed in April 2021) made no sense.

Governor Das described orderly development of the yield curve (read low rates) on government securities as a public good. What he failed to realize was that in a poor country, the best public good is low inflation. When the MPC meets next in early June, it must re-order its priorities. Instead of chasing elusive growth, it must revert to its swadharma, own dharma, and focus instead on inflation.

Mythili Bhusnurmath is a senior journalist and a former central banker.

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