Home / Opinion / Views /  RBI’s inflation scramble has little hope of a let-up

After early May’s off-cycle 40 basis points increase, the Reserve Bank of India (RBI) raised its repo rate on Wednesday by another 50 basis points to 4.9%, as advised by its rate-setting panel. Other rates linked to this policy rate (at which it effectively lends money to banks) went up in tandem. RBI’s Standing Deposit Facility (SDF), which replaced its reverse repo window in April, now pays lenders 4.65% for surpluses placed with it. The basic cost of credit in our economy has thus risen nearly one percentage point in just over a month. RBI Governor Shaktikanta Das spoke of an “orderly policy shift" enabled by India’s economic recovery, but that gloss cannot hide a scramble to get its inflation target of 6% (at most) back within range. Its own forecast for 2022-23, upped by a percentage point to 6.7%, augurs its likely failure to avert the shame of having to explain itself to the Centre under a policy frame adopted in 2016. Blame can be laid upon the Ukraine war, which sent commodity prices soaring. Yet, signs of a retail flare-up ahead had emerged many months earlier, so the central bank cannot acquit itself lightly of the charge that a monetary spurt brought on by its anxiety over covid-stricken growth was what originally let the goal of price stability down.

From oil and coal to fertilizer and wheat, we have suffered a global supply shock this year that has no end in sight. With its inflationary effects yet to rumble their way across supply chains, public fears of worse simply had to be quelled. By shifting stance to “withdrawal of accommodation" and calling price stability the “best guarantee" of durable prosperity, RBI sent out welcome signals. Stock indices slipped only a bit, while bond yields actually eased. This may have been because a feared liquidity slurp-up was given a pass, but can also be interpreted as relief over a reduced RBI credibility gap. On this score, its woes can be pinned on its tardy response up until April, before which all it did was run a few gingerly mop-ups of excess cash.

Could internal dissonance over its mandate have got in the way? Note that a lending rate of 4.9% is still negative in real terms (adjusted for inflation). So is RBI’s marginal rate at the upper end of its liquidity corridor (now at 5.15%). This still qualifies as loose money, frankly, and it will take further hikes for credit to truly tighten after the pandemic’s “whatever it takes" easing. Unease among economists over a sharp reversal is traceable to an analysis that casts doubt on the efficacy of policy tools in dampening inflation set off by supply scarcities; why risk a growth choke-off if prices are beyond control anyway? The hypothesis that’s under test, however, is the monetarist assertion that inflation is always the result of monetary excess. This was the rationale by which RBI was given additional policy latitude half a decade ago and set a clear inflation target of 4% (give or take 2%). Implicit in this novel framework was the idea that price stability would serve as the basis on which we’d strive to expand our economy. The very boldness of that reform lay in India aspiring to a new paradigm: maximize growth within the constraint of our currency retaining its retail value. It was a bid goodbye to the ‘money illusion’ of rupee figures looking larger than they should. Since inflated growth is easier to achieve, especially in an emerging market, this approach was sure to prove a challenge. Given the uneven ravages of runaway prices, though, it’s also a lot more equitable. Let’s give it our best shot.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout