Inflation has started to rise again — triggering talk the RBI cannot further delay a rate increase however unpalatable this might be to the Centre amid the third wave of the coronavirus that has again put fetters on growth.
Besides, the spike in global prices has thrown the government in a greater quandary.
Speculation is growing about a possible 100 basis points rise in policy rates, with the debate more on timing and their sequencing.
Partha Chatterjee of the Shiv Nadar University said, “The RBI should take into account the global inflation situation for two reasons. One, the structure of the world economy has changed and production processes have become much more integrated. This means inflation in one country is likely to impact inflation in another country.”
“However, the second reason might actually be more important – monetary policy spillover. It is only a matter of time the US Federal Reserve acts. This can have consequences in emerging economies unless well communicated and managed by all central banks, including RBI.”
“Hence, the RBI should shift its focus to containing inflation without further delay,” he said.
N.R. Bhanumurthy, vice-chancellor, the Ambedkar School of Economics University, said “It is going to be a very challenging task for the RBI to navigate the economy through these external risks...however I believe it has sufficient policy space to deal with the forthcoming downside risks. Tightening international financial conditions could force the RBI to hike policy interest rates earlier than they have simulated...but its risk on growth could be limited.”
India’s overall macroeconomic situation is in a recovery mode but the growth is concentrated at the top end, which is a worrying trend, according to former World Bank chief economist Kaushik Basu.
Amid the rising inflationary trends, Basu, who has also served as the Chief Economic Advisor to the Indian government during the UPA rule, said the country is facing stagflation and “very carefully curated policy interventions” are required to address the situation. Basu at present is a professor of Economics at the Cornell University in the United States.
While the aggregate economy is growing, “the bottom half of India” is in recession, Basu told PTI and noted that it was sad the country’s policy over the last few years has been largely focused on big businesses.
“India’s overall macroeconomic situation is in recovery mode... The worry stems from the fact that this growth is concentrated at the top end,” Basu said.
He also said the youth unemployment rate in the country touched 23 per cent, among the highest globally, even before the Covid-19 pandemic started.
Workers, farmers and small businesses are seeing negative growth, he added.
• Retail inflation at 6-month high of 5.59% in December
• Wholesale inflation in double digit for ninth consecutive month at 13.56% in December
• Spike in global prices area of concern