*****RBI must pivot to inflation control | Deccan Herald

Clipped from: https://www.deccanherald.com/opinion/second-edit/rbi-must-pivot-to-inflation-control-1100207.html


The Reserve Bank of India has given indications of a shift to prioritising inflation ahead of growth in its latest Monetary Policy Statement. In its first meeting of the new financial year, the Monetary Policy Committee of the RBI chose to keep the repo rate unchanged at 4% and retain its accommodative stance. But there is a shift in the wording, sentiment and tone on the key issues it will have to deal with in the coming months. A change in stance should have actually come earlier when the threat of inflation had started to get real. The RBI’s main mandate is to control inflation and it is accountable for any lapse on that front. But in the last two years, it paid more attention to promoting and incentivising growth. This was necessary when the pandemic had badly hit economic growth, but the RBI may have stuck a bit too long with that policy.

The bank is now seized of inflation concerns. It has raised its forecast for inflation to 5.7% for 2022-23 from its earlier assessment of 4.5%, made in February. The forecast assumes an average crude oil price of $100 per barrel and expects inflation at 6.3% in the first quarter and 5.8% in the second quarter. But the daily hike in petrol and diesel prices and the rise in commodity prices worldwide may make these projections go awry. It is likely that inflation may breach the upper threshold of the MPC’s inflation targeting framework for three consecutive quarters. On the growth front, it has lowered its forecast for this year to 7.2% from its earlier forecast of 7.8%. This is lower than the projections made by some other agencies and shows that the threat to growth is more than expected.

There has been much change in the country and the world since the MPC’s February meeting. While the third wave of the pandemic did not hurt the economy to any great extent, it slowed down the recovery. But Russia’s war on Ukraine, which started in late February, has done much harm. The prices of many commodities, including crude, have gone up and this will have implications for the country’s macroeconomic situation. The RBI may not be able to do much more now and the government will have to do the heavy lifting to promote growth. The MPC may change its stance from accommodative to neutral in its next meeting in June, as indicated by the policy statement. That may lead to hikes in interest rates in the coming months. Hopefully, the prospect of rising inflation will be taken more seriously than in the past.

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 )

Facebook photo

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

Connecting to %s