Image Source : REPRESENTATIONAL PIC The government and RBI took measures to check the inflation rate
Inflation Issue: RBI Monetary Policy Committee (MPC) member Shashanka Bhide on Friday batted for coordinated policy efforts to address the issue of the high inflation rate.
He asserted the high inflation rate in the last three quarters is mainly a consequence of the ‘exogenous’ price shocks. The inflationary pressures are high and it certainly is a test for India’s inflation targeting framework, Bhide added.
“The high inflation rate in Q2 FY2022-23 follows high inflation in the previous two quarters. High fuel and food prices and their spillover to other sectors have sustained the high inflation rate,” he said in an email interview with PTI.
The retail inflation based on CPI has remained above 6 per cent since January 2022, and it was 7. 41 per cent in September. The MPC factors in retail inflation while deciding the RBI’s bi-monthly monetary policy.
“While this pattern is mainly a consequence of the exogenous price shocks, it is important to take measures to limit the spillover of the price shocks to the rest of the economy. “Addressing these issues will require coordinated policy effort, monetary policy and other economic policies,” Bhide said.
Central bank is required to ensure retail inflation remains at 4 per cent
As per the mandate given to the RBI by the Union government, the central bank is required to ensure retail inflation remains at 4 per cent with a margin of 2 per cent on either side.
Noting that the present global macroeconomic environment is challenging in terms of inflationary pressures and growth, he said, “With its diverse economic base and prudent policies, India should be able to meet these challenges”.
Monetary policy tightening aims to bring down the inflationary pressures
Bhide said the monetary policy tightening by the RBI aims to bring down the inflationary pressures as high inflation adversely affects consumption and investment demand.
Observing that borrowing costs rise due to interest rate hikes, he said the expectations of lower inflation will help improve demand conditions.
The RBI has been aggressively raising the key interest rate since May to contain inflation.
It has so far hiked the short-term lending rate by 190 basis points, taking the rate to a nearly three-year high of 5.9 per cent.
The Reserve Bank will hold a special meeting of its rate-setting committee on November 3 to prepare a report for the government on why it failed to keep retail inflation below the target of 6 per cent for three consecutive quarters since January.
(With PTI input)
The six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das will prepare the report on reasons for the failure to meet the inflation target as well as the remedial measures the central bank is taking to bring down prices in the country.
On India’s current macroeconomic situation, Bhide said, “The risks come from the uncertain global environment, but the GDP growth for the current fiscal is expected to be close to 7 per cent”.
He asserted that the Indian economy has shown resilience in getting back to a growth trajectory after going through the multiple waves of the COVID-19 pandemic.
“The Covid-19 pandemic also presented the challenges on the global scale, affecting trade and supply chains,” Bhide said, adding the challenges that are now emerging include slowing down of export demand, financial market volatility and the uncertainty consequent to the Russia-Ukraine war.
According to him, the global growth slowdown is also expected to dampen the price pressures.
IMF chief Kristalina Georgieva has recently said the global economy is moving from a world of relative predictability to one of greater uncertainty.
6.5 per cent growth rate projection for the Indian economy in 2022-23
The World Bank on October 6 projected a 6.5 per cent growth rate for the Indian economy in 2022-23, a drop of one percentage point from its June 2022 projections, citing the deteriorating international environment. IMF has projected a growth rate of 6.8 per cent in 2022 compared to 8.7 per cent in 2021 for India.
Replying to a question on the rupee touching a historic low, Bhide said currency depreciation also reflects the strengthening of the US dollar against most currencies because of the sharp monetary policy tightening measures in the US.
“Weaker rupee also affects inflationary pressures as cost of imports rises at a time when the price of fuel commodities has remained high,” he opined.
Bhide — an honorary senior advisor at the National Council of Applied Economic Research, Delhi — noted that exporters may see a rise in earnings, but this may be offset by high import costs and slower export growth.
For the common citizens, he said, it is the impact of inflation through which the currency depreciation would be felt.
To a question on India’s widening trade deficit, Bhide said measures are needed to encourage exports and reduce the import bill at a time when global trade is slowing. India’s trade deficit widened to USD 26.72 billion in September, while exports contracted by 3.52 per cent to USD 32.62 billion.
(With PTI input)
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