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What is the article about?
- Recently, The Reserve Bank of India (RBI) has hiked the repo rate by 50 basis points to 5.90%, the fourth straight increase in the current cycle, to tame sustained above-target retail inflation rate.
Relevance:
- GS3: Indian Economy;
- Prelims: Inflation, RBI, Monetary Policy.
Analysis:
- Monetary policymakers were left with little choice but to raise interest rates by 50 basis points, as a bout of extreme volatility in international financial markets combined with persistently high domestic retail inflation to threaten macroeconomic stability, globally and in India.
- RBI Governor Shaktikanta Das cited the ‘aggressive monetary policy actions and even more aggressive communication from advanced economy central banks’ as a third shock — following the pandemic and Russia’s invasion of Ukraine — which he said had thrust the ‘global economy into the eye of a new storm’.
- “Emerging market economies, in particular, are confronted with challenges of slowing global growth, elevated food and energy prices, spillovers from advanced economy policy normalisation… and sharp currency depreciations,” Mr. Das explained, elaborating on the external challenges confronting emerging economies, including India.
- The rupee too has been under pressure, weakening by more than 7% against the dollar since the start of the current fiscal year in April. And this has added upward pressure to price stability by way of imported inflation.
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Imported inflation:
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- The RBI’s September issue of the Monetary Policy Report in fact pertinently observes that the ‘second-round effects of low growth and high inflation globally could keep domestic inflation at elevated levels even beyond eight quarters, necessitating appropriate monetary actions to anchor inflation expectations’.
- The central bank’s own projections, in fact, do not anticipate a slowing in India’s retail inflation below its upper tolerance threshold of 6% till the January-March quarter.
- These include the likelihood of higher pass-through of input costs by service providers on increased demand, as well as upside risks to food prices from both the lower kharif output of rice and pulses, and the unseasonably excess spells of rainfall in some regions that have pushed up the prices of vegetables.
Way Forward:
- With the RBI’s latest surveys of households’ inflation expectations and consumer confidence too signalling that price pressures will continue to restrain consumption, inflation control will have to remain the top policy priority.
