The RBI Gets Serious About Inflation

The Governor of the Reserve Bank of India, Shaktikanta Das seemed to echo these sentiments when he announced another 50 basis point hike in interest rates in a bid to tackle inflation

Members of the ruling party have been painstakingly attempting to say that the problem of inflation is not serious as portrayed by opposition parties and a section of the media. Their contention is two fold: the first is that inflation was far worse during the second term of the previous UPA regime. The second is that inflation currently is a global phenomenon and India is performing better than most countries in the world. Technically, data supports the BJP spokespersons on both counts. But that is of little consolidation to hundreds of millions of low income Indians who are confronting high retail inflation, particularly of food items, after being bruised and battered financially by two years of the Covid pandemic. In fact, the Governor of the Reserve Bank of India, Shaktikanta Das seemed to echo these sentiments when he announced another 50 basis point hike in interest rates in a bid to tackle inflation. While announcing the third hike in interest rates since May 2022, Mr Das categorically stated that inflation still remans at uncomfortably high levels and could damage growth prospects if not quickly controlled.

As the chart above indicates, the retail inflation rate has been consistently above the self posed danger mark of the central bank. According to rules fixed by the Monetary Policy Committee of the RBI, the retail rate of inflation should not exceed 4%. Anything above 4% is a hint that inflationary pressures are building up. Besides, alarm bells must ring when retail inflation crosses 6%, which it has throughout 2022. Till April 2022, the RBI kept postponing the decision to hike interest rates to control inflation as it did not want to adversely affect economic recovery. But matters started getting out of hand the same month when the retail inflation rate zoomed to almost 7.8% in April. Within a few days, the RBI announced a 40 basis point rate hike; followed by a 50 basis point hike in June and another 50 basis point hike yesterday. The RBI did not make it clear if it was considering another interest rate hike in the future, but did make it clear that it expects inflationary pressures to ease in a few months as the Kharif harvest enters the market.

In fact, data clearly reveals that inflationary pressures are easing since the peak levels of April. Besides, global crude oil prices have fallen below $ 90 per barrel after many months and analysts expect both food and fuel driven inflation to ease in the next few months. And to give credit to the spirited BJP spokespersons, India has indeed done well compared to most economies of the world, as highlighted by an India Tracker story on July 28, 2022. Forget countries like Sri Lanka and Pakistan that are basket cases. The inflation rate in large economies like Brazil and South Africa and even advanced economies like the US and UK is higher than in India. Of course, ordinary Indians will applaud when retail inflation falls below at least 5% in the near future.