Keep Calm And Carry On

Context: Inflation in India, at least now, is unlikely to be impacted too much by higher inflation elsewhere but still there is a need for caution and vigilance in setting future monetary policy.

Rationale for continuing accommodative monetary policy

• No structural break in inflation: Covid period represents continuity rather than discontinuity. As
  • Pre & Post-Covid inflation numbers are similar for headline or core inflation, but also for most of the components of the inflation basket.
• Unreliable Data: Due to insufficient & large swings in data, it is difficult to conclude that higher inflation has become entrenched.
• Unpredictable signal of future inflation as Household inflation expectations in India remain decoupled from actual inflation.
• Credibility of Monetary Policy Framework in range bound inflation targeting that was witnessed during the economic slowdown in the pre-pandemic years. Also,
  • Inflation in India has averaged 6% in the last 18 months & it falls within the inflation target band of 2-6% (RBI’s Monetary Policy Committee).
• No spill over effect of global inflation: During last 18 months of Covid-19, inflation in India does not correlate with global inflation (US or that in emerging market economies).

Way Forward: India’s current income levels and its growth aspirations i.e. keep prices competitive and inflation low in a macro sustainable way calls for efficient production structures, focusing on

• Low cost of production, continuous innovation, leveraging of scale economies.
• Better integration within domestic and international markets.
• Implementation of sustainable fiscal and monetary policies.