RBI should return to its dharma of taming inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Inflation

Mains level : Paper 3- Role of RBI in taming inflation

The article highlights the need for the RBI to focus on inflation instead of pursuing elusive growth.

Is inflation at a level to be concerned about?

  • Due to the devastation caused by the pandemic, MPC kept its stance to ‘look through’ the sustained rise in prices through much of last year.
  • The 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 be concerned.
  • 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 relates to the first month of the lockdown.

Inflation comes down but after causing devastation

  • 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.
  • However, before inflation comes down, it brings untold misery to the public at large.
  •  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.

What is causing inflation?

  • Monetary policy acts with long and indeterminate lags.
  • Far from spurring credit offtake through low interest rates 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.
  • The RBI needs to be appreciated for doing its bit to keep the wheels of our economy moving during the pandemic.
  • However, its failure to shift gear in the face of mounting evidence of inflation cannot be neglected.
  • When inflation was breaching the upper end of RBI’s target band for months on end, the message should have been clear.

US recovery and its impact on Indian economy

  • Globally, commodity prices are already on the rise.
  • Not without reason, it would seem, as borne out by 12 May’s inflation print of 4.2%, America’s highest in 12 years
  • Part of the reason is the excessive easing of US monetary and fiscal policies.
  • 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.

Consider the question “What are the factors stoking inflation in the pandemic? How far the monetary policies pursued by the central bank is responsible for it?”

Conclusion

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.

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