Inflation check – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/inflation-check/article34369052.ece

The Centre needs to pull its weight to keep inflation in check along with the RBI

The Monetary Policy Committee decided to give precedence to growth over inflation in the recent meeting and it is not difficult to see why. Given the nebulous state of the economy and movement restrictions in large metros threatening to derail growth in FY22, it had to do all it could to ensure that growth is not affected. But the committee may not be able to keep ignoring inflation for long, given the pace at which it is increasing and the debilitating impact it has on household savings and consumption. Given the tough challenge before the RBI in managing liquidity and supporting the government borrowing, it may not be able to do the job all by itself. A close look at the drivers of inflation shows that the Centre needs to work with the RBI to check prices.

With credit growth still very tepid at 5.2 per cent, increasing policy rates will not help in cooling inflation. The RBI is facing a tricky situation as the excess liquidity due to the open market operations and foreign exchange interventions is adding to the inflationary pressure. The central bank has rightly shifted its forex interventions to the forward market but it will have a tough job in maintaining liquidity at the optimal level given that it has also promised to buy G-Secs in the secondary market through the G-SAP programme. With the second wave of Covid likely to expand the government’s fiscal deficit for FY22, government borrowing may increase further. While the central bank will have to use all the tools at its disposal, the Centre also needs to lend a hand to keep inflation in control.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s