At 7.01%, the Consumer Price Index (CPI) for the month of June stayed above the upper limit of the Reserve Bank of India (RBI)’s tolerance band for the sixth consecutive month. Most forecasters expect inflation to stay above the 6% mark for most of this fiscal year. It is not surprising then that economic policy has pivoted towards inflation management from supporting growth. Not only has RBI hiked interest rates by 90 basis points between May and June, the Centre,
At 7.01%, the Consumer Price Index (CPI) for the month of June stayed above the upper limit of the Reserve Bank of India (RBI)’s tolerance band for the sixth consecutive month. Most forecasters expect inflation to stay above the 6% mark for most of this fiscal year. It is not surprising then that economic policy has pivoted towards inflation management from supporting growth. Not only has RBI hiked interest rates by 90 basis points between May and June, the Centre, too, has taken steps to bring down prices. That the finance minister reiterated the State’s commitment to stay vigilant after the release of inflation data underlines the prevailing policy thinking.
Under India’s inflation-targeting framework, it is RBI, not the finance ministry, that is responsible for keeping inflation in check. To be sure, this division of labour on inflation control is rooted in theoretical foundations of inflation targeting, which is focused on demand-driven inflation. Interest rate hikes are a policy administered demand shock to the system when inflation spikes. Such an intervention can do little when inflation is rising because of supply-side tailwinds — higher energy prices and supply chain bottlenecks. Given India’s import dependence on energy, inflationary pressures on this front are largely a fait accompli for the economy. It is on this count that there could be some relief. As fears of an economic slowdown, even recession, loom large in advanced economies, commodity prices are showing signs of moderation. If one factors in commodity market speculation in price rise, the price correction could be disproportionate. India will be a beneficiary of this, even though pressure on the rupee will neutralise some benefits of downward movement in international prices. That the June quarter inflation ended at 7.3%, 20 basis points lower than Monetary Policy Committee’s June forecast of 7.5% could be a pointer to what to expect.
To be sure, the coming recession in advanced economies will not be an unambiguous blessing for India. It will also generate headwinds for export demand, both for goods as well as services, and, therefore, overall growth. This is why it is extremely important that economic policy does not lose focus on supporting domestic growth while trying to fight inflation. Index of Industrial Production (IIP) numbers for May show that industrial activity was just 1.7% over pre-pandemic (May 2019) levels. This should warn both RBI and the finance ministry against any complacency on the growth front.
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