Inflation Targeting Must Not Be At The Cost Of Growth
The India Commentary view
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By Our Editorial Team
First publised on 2022-07-14 14:52:33
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The India Commentary view
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Although
commodity prices have started declining from the highs they had attained after
the war started in Ukraine, inflation has remained elevated worldwide. The June
figures showed the Consumer Price Index (CPI) was 7.01% percent in India. In
the US, inflation was at 9.1% (annualized), the highest in 40 years. As the US
Fed has already indicated that it will target inflation by continuously hiking
policy rates until it is tamed, the FIIs are going to withdraw investments from
India, putting more pressure on the rupee. If dollars become costlier, India's
import bill will balloon further and that will add to inflationary pressures.
This is a situation that will also lead the MPC of the RBI to hike policy rates
and adopt a tight money policy by squeezing out liquidity from the market.
Needless to say both these actions, although necessary to fight inflation, will
ensure that there is less money to borrow and even that will come at a higher
cost. In short, it will puncture growth in the short to medium term.
Normally,
cost-push inflation, which is what India and the rest of the world is
experiencing now, cannot be fought only by changes in monetary policy. The
Centre also pitched in by making adjustments in the import and export policies
of some items to cool prices in the domestic market. But the RBI was criticized
for falling behind the curve and it is now making it up by pushing through rate
hikes in successive MPC meetings, the first in an off-cycle action. But it has
to keep in mind that consumer demand is not rising and remains subdued. Hence,
growth will be stymied if rates are hiked beyond a certain level. On the other
hand, India was performing well on the export front. But with recession
predicted in advanced economies, demand for goods and services from such
nations will drop, hitting exports too. Hence the RBI has to strike a good
balance between fighting inflation and pushing growth.
