RBI economists call rising inflation transitory, owing to pent-up demand – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/indicators/rbi-economists-call-rising-inflation-transitory-owing-to-pent-up-demand/articleshow/83576454.cmsSynopsis

Economists at the central bank also prescribe quantifiable metrics to bring down fiscal expenditure and target them for better efficiency. These two views emerge from the research department of the RBI.

India’s inflation may have breached the prescribed target for the Reserve Bank of India, but the economists at the central bank believe that it may just be transitory and is driven by release of pent-up demand. High frequency indicators show pressures easing, which may get support from normal monsoon though core inflation is at its highest since 2014.

Economists at the central bank also prescribe quantifiable metrics to bring down fiscal expenditure and target them for better efficiency. These two views emerge from the research department of the RBI.

The economy has the resilience and the fundamentals to bounce back from the pandemic and unshackle itself from pre-existing cyclical and structural hindrances, RBI economists said.

Looking ahead, even as growth seems set to revive contingent on continued policy support and speedy and widespread vaccination, inflation merits close watching. With commodity prices rising, the uncertainty surrounding the inflation outlook, poses risks to the recovery and spillover risks to financial markets, warned the authors of the article, led by deputy governor Michael D Patra.

Retail inflation, measured by the consumer price index, jumped to 6.3% in May after easing to 4.23% in April, primarily due to higher food and fuel prices. CPI excluding food and fuel inflation surged to 6.6%, the highest since May 2014. All core sub-groups registered a pick-up in inflation, with substantial increases in clothing and footwear, household goods and services, transport and communication, recreation and amusement, and personal care and effects

Another article on fiscal metrics underscored a need to improve the quality of government expenditure with thrust of fiscal policy stance on capital expenditure and infrastructure creation, by both center and states governments. Accordingly, it may be important to lay down a medium-term fiscal framework with concrete measures and targets. Shoring up the quality of expenditure through a quantifiable matrix will help provide the necessary checks and balances and should be integrated into the fiscal framework.

“Instead of across-the board expenditure cuts, a well-thought-out strategic policy mix should protect programmes with high marginal social benefit, thus ensuring that the intent to improve quality fructifies into desirable outcomes,” the article said, placing importance on
upgradation of the social infrastructure by investing in health, education and skilling.

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