The Reserve Bank Should Return To Its Dharma Of Taming Inflation

Context: RBI’s Monetary Policy Committee (MPC) must reorder its priorities and put price stability on top of its agenda.

Issues with the monetary policy targeting in India

• Confidence in lowering of Inflation: While the latest inflation numbers have surely come down to 4.3% (April 2021), they carry little validity as the base of comparison (April 2020) has already been rubbished by the RBI on account of numerous infirmities from lockdown and other disruptions.
• Unwanted political consequences: There are few things that the Indian electorate is more intolerant and unforgiving of as inflation.
• For e.g. both in the 1980 Lok Sabha elections and the 1998 Delhi assembly polls, it was a sharp rise in onion prices that toppled ruling governments.
  • All governments fear inflation. This is because of the following reasons:
    • Any rise in inflation, especially food inflation, hurts the poor, especially in a country where close to 20% of the population lives below the poverty line.
    • Add to that the distress caused by job losses on account of the pandemic, and this time around, the pain is likely to be magnified many times over.
• Impact of the global rise in prices: Globally, commodity prices are already on the rise, with inflationary expectations in the US touching a decadal high in April 2021.
  • Part of the reason is the excessive easing of US monetary and fiscal policies.
  • As the US economy recovers, the dollar strengthens, and US interest rates rise, the rupee is bound to weaken in response, adding to inflationary pressures here.
  • In light of the lag in monetary policy, this excess liquidity has led to a rise in wholesale price inflation at 7.4% (March 2021), the highest in 8 years.
• Misplaced priorities: The Governor of the RBI has described orderly development of the yield of the curve (read low rates) on government securities as a public good.
  • What he failed to realize was that in a poor country, the best public good is low inflation.

Conclusion: When the MPC meets next in early June, it must reorder its priorities. Instead of chasing elusive growth, it must revert to its focus on inflation.