Boxed in: On need for inflation control as top policy priority

As high prices restrain consumption, inflation control must be the top policy priority

October 03, 2022 12:10 am | Updated 12:48 pm IST

The Reserve Bank of India’s rate decision on Friday was ultimately inevitable. 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 combines 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. 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. And Mr. Das was right to point out the multiple factors that could upend the RBI’s inflation outlook. 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. The surfeit of liquidity or cash in the banking system, which is expected to be buoyed by enhanced government spending in the coming months, could also threaten price stability and the RBI Governor was at pains to note that the policy stance of a calibrated ‘withdrawal of accommodation’ had become an imperative. Specifically, he pointed out that ‘even as the nominal policy repo rate had been raised by 190 basis points since May, the rate adjusted for inflation still trailed the 2019 levels’. 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.

To read this editorial in Hindi, click here.

To read this editorial in Tamil, click here.

Top News Today

Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in


Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.