By Rahul Dixit
With the retail inflation spiking to 7.41 per cent in September, much above the Reserve Bank of India’s upper tolerance band, the sword of recession still looms over India. Despite being better placed on the economic front with its homogenous monetary policies, India still may not remain totally insulated from the global economic trend. Being a net commodity importer India has a tight-rope walk to manage in the next few fiscal quarters as geopolitical issue will continue to drag on for a long period. The hints are already available in the latest inflation data and in the latest RBI article which says, “the fight against inflation is set to be dogged and prolonged.”
The central bank is treading with a cautious optimism as its Monetary Policy Committee (MPC) mulls another repo rate hike to keep inflation in check. But the moot question is about the RBI’s consistent failure in keeping the inflation rate within its tolerance levels. For the ninth month in row retail inflation has gone beyond the upper band of 6 per cent which reflects really bad on the RBI and its policies. It has to do a lot of explaining to the Government which is pulling all strings to keep the depreciation of rupee within a sizeable limit. The ministerial level is working overtime to explain the fall of rupee as compared to the dollar, even resorting to ‘crafty comparisons’ between ‘strength of both the rupee and dollar’. Despite the play of words, the fact remains that the rupee is under global pressure and its effects are clearly visible in the Consumer Price Index (CPI).
The RBI has acknowledged the rise in CPI inflation beyond the upper limit for three consecutive quarters. And though it is seeking to focus “on realigning inflation within the target”, it is left with only two choices, either to go for another sizeable interest rate hike or simply stop the monetary tightening to allow growth take care of its own pressure. While the central bank is expecting headline inflation to ease from its September high on the back of easing momentum and favourable base effects, a lot of factors including the unending Russia-Ukraine war, falling rupee, rising oil prices, and supply chain disruption will play a key role in the ultimate outcome. The September data of Consumer Price Index already holds some big clues. It was expected that the monsoon will ease and food prices will settle down from the July-August levels. However, vegetable and cereals turned out to be the biggest culprits rising 2.6 per cent from the preceding month. Rice and wheat also saw a 2 per cent jump from August levels. Food and beverages are set to define inflation levels in the next month too despite the “positive developments” the RBI is hoping for.
Food prices will continue to remain under the cloud due to the overstay of rains in many parts of the country. The fag-end of monsoon has seen some extreme rainfall events thus affecting the Kharif yield. Many States have reported big loss to standing crop. A 6 per cent shortfall in Kharif crop has already been projected which will result in price rise for the entire festival season. This makes the short-term inflation target quite difficult for the RBI to handle. Its policy, as Governor Mr. Shaktikanta Das had already suggested, has to centre around containing price pressures. Allowing it to broaden will leave a huge impact on the overall position and take inflation to dangerous levels. The projected growth in financial year 2023-24 then stands the threat of being compromised.
As top nations continue their firefighting to control inflation, India is still better placed due to its prudent economic policies, infusion of funds, and schemes like Performance Linked Incentives. Yet, recession remains a constant threat due to weak global cues and pressure on supply chains. The RBI’s optimism and resolve to fight inflation with a dogged determination are absolutely welcome but all those come with many riders. Internal and external pressures will continue to test India’s rise as one of the fasted growing economies in the world.
The RBI article has also talked of achieving a negative inflation differential. It is an ambitious goal but to fulfill it in the present times the central bank will first have to find a quick-fix to tame inflation. It is a tricky task.
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