Don’t forget growth in race to curb inflation
Amid the ongoing fight against inflation, will the elevated interest rates cripple demand and lead the country to unacceptably low economic growth? That is a big concern hanging like the sword of Damocles. The fractured verdict by the RBI Monetary Policy Committee in hiking the interest rate has laid bare the conflicting views of the advisors and policymakers. Two external members of the MPC, who voted against the hike, cautioned that the excessive front-loading of rate hikes carries the risk of overshooting, while four other MPC members espoused the hike. Ashima Goyal, an MPC member and emeritus professor at Indira Gandhi Institute of Development Research, reckons that raising real policy rates to reduce demand has a stronger effect on growth than inflation. According to her, overshooting can have persistent deleterious effects, including instability. The other MPC member, Jayanth R Varma, professor of IIM-A, said a repo rate of 6.50% (the rate at which RBI lends money to commercial banks) would likely overshoot the policy rate needed to achieve price stability. In December, too, he had voted against a 0.35% hike.
Central banks around the globe have an unenviable job of regulating the unusually flaring inflation amid fears of a recession. RBI Governor Shaktikanta Das doesn’t rule out the uncertainty over inflation. He cites a string of triggers, such as geopolitical tensions, global financial market volatility, rising non-oil commodity prices, volatile crude oil prices, and weather-related events. But on February 8, the central bank hiked the benchmark interest rate for the sixth time in a row in the current tightening cycle, pushing the rate cumulatively by 2.5% in 10 months to 6.5%. This has made life difficult for the common person, with loan pricing shooting through the roof.
Despite RBI’s continuous efforts, retail inflation accelerated to 6.52% in January, the highest in three months, way above its comfort zone of 4–6%. There are a few worrying points. For one, the rural inflation at 6.85% is way higher than the urban inflation of 6%. Two, several large states have recorded higher inflation than the national average.
Incidentally, when almost every other segment showed an increase in prices, vegetables showed a negative growth of 11.70%, promising tough times for farmers and the rural economy. The global outlook may have complicated India’s fight against inflation. But we can’t afford to let a slowdown shave off our growth prospects for long.