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Inflation & RBI policy

Inflation & RBI policy

UPSC CSE – SYLLABUS – GS – 3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 Inflation & RBI policy

  • India’s central bank — the Reserve Bank of India — which released its latest bi-monthly review of monetary policylast week.
  • The RBI is, by law, required to maintain the retail inflation rate within a band of 2% and 6%.
  • At the start of the Covid breakout in late March and again in end-May, the RBI furiously cut interest rates so as to boost economic activity, while largely ignoring the hardening retail inflation rate.
  • Governor made it amply clear that the RBI will do everything in its power to revive growth.
  • But in the last three policy reviews, including the latest one, the Monetary Policy Committee of the RBI has decided to keep the benchmark policy interest rate — the repo rate or the interest rate at which it lends money to banks — unchanged.

Because even though India’s economy is struggling to grow, the retail inflation rate — calculated using Consumer Price Index — had remained above RBI comfort zone for almost every month since last November.

  • Before the December 4 policy announcement, it was believed — much like in November and December last year — that it is just a matter of time that retail inflation will come down, and when it does, the RBI will restart cutting interest rates to boost economic activity.
  • At long last, the RBI admits that, far from easing up, the inflation outlook is getting worse.
  • The outlook for inflation has turned adverse relative to expectations in the last two months, stated the policy statement.
  • As a result, the RBI has substantially raised its inflation forecast not just for the current quarter (October to December) but also for the two quarters after this one — January to March and April to June in 2021.
  • It is taken from RBI’s latest “survey of professional forecasters on macroeconomic indicators”.
  • The figures in parenthesis show the extent of revisions.
  • As can be seen by a sea of plus signs, forecasters have bumped up inflation forecasts across the board — be it retail or wholesale, headline or core, this quarter or two quarters hence.

Table 3, which is taken from RBI latest “Consumer Confidence Survey”, is quite revealing too as it shows that, in the year ahead, consumers are optimistic about every macroeconomic variable barring the issue of prices.

Way forward:

  • The RBI underscores the need for “proactive supply management strategies.
  • Further efforts are necessary to mitigate supply-side driven inflation pressures,” it states.
  • The RBI is already doing the best it can — not raising interest rates even when all types of inflation parameters are off the charts.
  • A year down the line, India still cannot be characterised as facing stagflation.

Source: ” Indian Express”.


Discuss how persistently high inflation undermined RBI’s effort to revive growth.