Given that the phenomenon of rising inflation seen in May and June is likely to be temporary, a function of shutdowns and other pandemic-induced disruptions, jacking up interest rates in an effort to arrest inflation is plain unwarranted.
The ReserveBank of India(RBI) is likely to maintain its accommodative monetary policy stance for quite a while and not raise policy rates in the near term. A recent RBI study, anchored by Deputy Governor Michael Patra, finds that the pickup in inflation of late is driven largely by adverse supply shocks due partial lockdowns, and so does not warrant a rate hike. We do endorse the diagnosis. Given that the phenomenon of rising inflation seen in May and June is likely to be temporary, a function of shutdowns and other pandemic-induced disruptions, jacking up interest rates in an effort to arrest inflation is plain unwarranted. As the lockdowns are gradually eased, the logistical bottlenecks would be removed, and which, in turn, would surely wind down the price spiral going forward. RBI’s reading of the economic tea leaves seems spot-on.
The way ahead is to boost the growth momentum, in the wake of unprecedented contraction of economic activity, by shoring up investment and capital formation. RBI has the prime institutional role to indicate a conducive and stable interest-rate regime to gainfully step up economic output. The cost of funds must stay attractive, to incentivise economic activity right across the board. In any case, RBI’s policy of flexible inflation targeting does specifically require that its Monetary Policy Committee support growth while inducing price stability and targeting an inflation rate of 4% within a range of plus or minus 2%. The Consumer Price Inflation Index has been well above the upper tolerance band of 6% lately.
US policymakers, too, feel the current bout of inflation is transient. The US Fed proposes to keep rates steady for the foreseeable future. Premature monetary tightening by RBI would strengthen the rupee and hurt exports, just as world trade is picking up. The government must step up its investment and other fiscal measures to boost activity, even as RBI keeps the interest rate regime stable. It would help to slash the high duties on petroproducts, in the meantime.
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Stock score of Bank of India Ltd moved up by 1 in a month on a 10-point scale.