The April rise in inflation shows why the Reserve Bank of India (RBI) should have turned its attention to price stability much earlier. Retail prices, tracked by the Consumer Price Index (CPI), rose 7.8% from a year ago, alarmingly above the RBI’s limit of 6%. Food prices increased by 8.4%. As always, the poor of the country have to bear the brunt of this. For them, what doesn’t matter is that it is not an ‘overheated’ economy red-hot by roaring demand, but largely the result of a global supply squeeze caused by a virus and war. It shouldn’t matter to inflation fighters either. Finally, in a significant policy reform of 2016, India gave its nod to the proposal that there is always an additional money increase in prices for what is available, so liquidity levels should always be kept under control, even if Why should there be any increase in prices? Under this framework, a central bank refrigerant is required for a price gauge in the red zone. It should ideally be pre-emptive, as any reaction would need to be magnified afterwards. With the initial price volatility closing in as mere blips, the RBI now has an uphill task. Instead of whether demand or supply caused the April flare-up, what analysis should divide is core inflation, in addition to the overall rate.
If the retail rate is removed from volatile price inputs like food and fuel, core inflation remains. It offers a less-volatile view of how prices turn hard around, which could result in an oil flare-up that sets off a normal cost hike as price mark-ups feed their way into the economy. . In the case of India, we have also had to worry about the onset of rapidly rising wholesale prices. Plus, too much worry of tough times can lead to more hardship, as vendors charge more and employees demand pay increases. The shock thus moves in waves and is reflected in the core rate, whose heat-up is a sign of continued price growth. How this is best calculated is open to debate, but Thursday’s data suggests the core of the CPI is also well above its danger mark of 6%. Estimates place it in the scary range of 6-7%. Now, while an economy may behave strangely, as it depends on a number of diverse factors, the core gauges under surveillance have begun to appear ‘critical’, in the sense that drastic action is required to either Be it the widespread fall or the formal explanation of the RBI’s failure, so should they be if the nerves are at Mint Street. It is unnecessarily unclear whether hard money at a negative real interest rate can actually drive prices down by the RBI’s deadline of mid-2022-23.
Recently, the RBI has undoubtedly shown urgency on inflation. Its tone on May 4, when it raised its prime lending rate from 4% to 4.4%, signaled not to let its role as the government’s debt manager get in the way of price controls. Yet, vaguely, it has yet to shift its policy stance from ‘accommodative’ to ‘neutral’. It also appears that the pre-reform outlook retains an impact on its rate-setting panel, with an uptick in demand seen as a dire need for money, but not a supply shock. For decades, we have told ourselves that our supply constraints have made inflation out of reach and largely a dynamic target. But now that we have sought control over the intrinsic value of the Indian rupee, let’s ignore the inflation target. Sure, this monetarist guts may yet fail, proving its critics right. Facing its first real test, however, this historic policy test should not let us down for lack of a champion.