Economy

‘Energy transition poses inflation risks’

The ongoing worldwide transition to green energy poses a significant risk of triggering energy price shocks similar to the 1970s, which would accelerate inflation, said Jayanth Varma, the sole member of the RBI’s Monetary Policy Committee (MPC) to vote against continuing with the central bank’s ‘accommodative’ policy stance.

“This means that the upside risks to long term inflation and to inflation expectations are now more aggravated,” Mr. Varma said at the last MPC meeting, the minutes of which were released on Friday.

“My second recent concern is about the tail risk to global growth posed by emerging financial sector fragility in China reminiscent of Japan of the late 1980s,” he said. “Both of these risks — one to inflation and the other to growth — are well beyond the control of the MPC, but they warrant a heightened degree of flexibility and agility,” Mr. Varma stressed.

‘Slow motion’

“A pattern of policy making in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate,” he asserted, adding that he was in favour of raising the reverse repo rate from the current 3.35% towards 4% so as to ‘demonstrate the MPC’s commitment to the inflation target, help anchor expectations and enhance macroeconomic stability’.

Reiterating his reservations from the previous policy meeting in August, Mr. Varma said his central argument was that the COVID-19 pandemic had mutated into a human tragedy rather than an economic crisis, and monetary policy would be far less effective than fiscal measures in providing targeted relief to the worst hit segments of the economy. Also, inflationary pressures were showing signs of greater persistence than anticipated earlier, he added.

Other members who voted to hold interest rates and retain the ‘accommodative’ stance too flagged concerns about the outlook for inflation as the MPC observed that fuel inflation had edged up to new high in August and core inflation, inflation excluding food and fuel, remained elevated and sticky at 5.8% in July-August 2021.

The MPC also observed that reduction in core CPI inflation rate from present levels would require a reduction in petroleum fuel prices.

“Core inflation is affected by the prices of transport fuels and transport services that are directly affected by the crude oil price shocks,” noted Shashanka Bhide, adding that ‘reduction in indirect taxes would play an important role in easing shocks on transport costs and overall inflation’. A view echoed by Ashima Goyal, who too urged tax cuts on fuels.

Stating that the formation of inflation was being buffeted by repeated shocks that had taken fuel inflation to an all time high and turned core inflation persistent, RBI Deputy Governor Michael D Patra said even as domestic macroeconomic configurations were improving, risks from global developments were rising, which, he stressed, warranted a close watch as they could stifle the recovery that was underway in India.

Dr. Patra said exports faced risks from logistics bottlenecks including shortages of containers and personnel in international shipping, and elevated freight rates.

“Global growth is losing steam, circumscribing the strength of the recovery with shortages of key intermediates such as chips, and semiconductors. And inflation is now everywhere and raging with implications for the revival of consumption demand,” he observed. “In my view, the biggest risks to India’s macroeconomic prospects are global and they could materialise suddenly,” he cautioned, adding that it was crucial for the moment to maintain congenial financial conditions.


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Printable version | Nov 30, 2021 3:33:22 AM | https://www.thehindu.com/business/Economy/energy-transition-poses-inflation-risks/article37131153.ece

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