Ignoring inflation may not be wise

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has maintained the status quo on interest rates and retained its accommodative stance, though there were expectations that it would start its policy normalisation process this month. The MPC has chosen to retain the policy rates unchanged for a consecutive 10th time, sending out the message that it considered steps to boost economic growth more important than addressing concerns over rising inflation. The policy statement, too, made this clear. The repo rate, the rate at which the central bank lends, remains at 4%, and the reverse repo, the rate at which the banks park their money with it, remains at 3.35%. The idea is that this would encourage banks to lend more to boost investment and consumption. But the logic has not worked well in the last many quarters. The RBI seems to be taking a risk on inflation with its stance.

The central bank expects the economy to grow by 7.8%, lower than the IMF estimate of 9% and the Economic Survey’s projection of 8-8.5%. It foresees growth in the four quarters of the next financial year to be 17.2%, 7%, 4.3%, and 4.5%. Economic growth has suffered and will continue to be subdued because the nascent recovery was hit by the Omicron wave, both at the global and the national levels. Government expenditure in the country was not high enough to give a big boost to the economy. Private consumption, which holds the key to growth, is much below the pre-pandemic levels and shows no sign of improving. The RBI expects that the government’s capital investment programmes would make a difference in the coming quarters, but past experience does not support the hope. The course of the pandemic is still uncertain and its effects on the economy will, in any case, continue to be felt.

The central bank believes that the retail price rise has been in tune with its expectations. It thinks that it will be about 4.5% during the next financial year, down from 5.3% this year. But it may be underestimating the problem. It expects food and vegetable prices to come down in the coming weeks and hopes for a normal monsoon, but there are other factors that can add to price levels. Global commodity prices and fuel prices are increasing. Crude prices have seen major increases in the past weeks. Retail fuel prices are certain to be increased after the current round of Assembly elections. That will have an impact on general price levels. Central banks in most other countries have started their policy normalisation measures by tightening rates. The RBI’s primary mandate is inflation control but it has not started paying it the attention that it needs.