Mint Street and North Block must maintain close coordination in making sure that our policy response does not throw the baby (of growth) out with the bathwater (of inflation)
That the April inflation number would be higher than the 6.95% reading in March 2022 was a given, especially after the unscheduled rate hike by the Monetary Policy Committee (MPC) of Reserve Bank of India on May 4. Even then, the 7.79% Consumer Price Index (CPI) growth in April has caught analysts by surprise. What happens now? The most predictable response will be yet another round of interest rate hikes when the MPC meets in early June.
But will a monetary tightening be able to control inflation? There is good reason for scepticism on this count. Interest rate hikes are not going to bring down the cost of crude oil. This year’s Union Budget expected crude prices to be in the range of $70-75 per barrel. They have been trending above $100 for months now and could go even higher once the pandemic situation in China improves. A similar dilemma awaits policy makers on the food price front. A surge in global food prices has come as an insurance for farmers who have been facing rising cost of cultivation. But a premature and stronger than usual heatwave has hit yields for critical crops such as wheat. India is now faced with an unenviable choice between allowing farmers to exploit windfall export gains or acting pre-emptively to prevent even perceived shortages encouraging speculative activities which will fuel food inflation fires.
To be sure, neither of these arguments suggest that India should persist with the kind of easy money policy unleashed after the pandemic. Negative real interest rates hurt those who live on savings and also encourage misallocation of scarce capital into activities which might not be prudent from a long-run perspective. The fact that the state of economic recovery is still far from broad-based will only complicate the task of fighting inflation. The long-term benefits of monetary policy normalisation notwithstanding, there is bound to be short-term pain when borrowing costs go up. So, what is to be done? India’s economic policy framework has delegated the task of keeping inflation under control to the monetary policy arm. The theoretical framework of such a division of labour is by and large null and void when a geopolitical crisis is among the biggest drivers of inflation and comes on the back of an unprecedented shock due to the pandemic. Mint Street and North Block must maintain close coordination in making sure that our policy response does not throw the baby (of growth) out with the bathwater (of inflation).
{{/usCountry}}To be sure, neither of these arguments suggest that India should persist with the kind of easy money policy unleashed after the pandemic. Negative real interest rates hurt those who live on savings and also encourage misallocation of scarce capital into activities which might not be prudent from a long-run perspective. The fact that the state of economic recovery is still far from broad-based will only complicate the task of fighting inflation. The long-term benefits of monetary policy normalisation notwithstanding, there is bound to be short-term pain when borrowing costs go up. So, what is to be done? India’s economic policy framework has delegated the task of keeping inflation under control to the monetary policy arm. The theoretical framework of such a division of labour is by and large null and void when a geopolitical crisis is among the biggest drivers of inflation and comes on the back of an unprecedented shock due to the pandemic. Mint Street and North Block must maintain close coordination in making sure that our policy response does not throw the baby (of growth) out with the bathwater (of inflation).
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