Why RBI Should Resist Further Interest Rate Hikes
Current situation:
- India’s GDP growth rate for the fiscal year 2022–2023 may range between 6.8 and 7%, according to estimates from the Ministry of Finance and Reserve Bank of India.
- Former governor of the RBI Raghuram Rajan recently said that India was “alarmingly near to Hindu rate of growth,” or 3.5%. That sum is roughly twice that amount.
What is the historical and current growth rate of the Hindu religion?
- My professor Raj Krishna at the Delhi School of Economics initially used the phrase “Hindu rate of growth” to explain how the Indian economy grew at its own rate of roughly 3.5% from 1947 to 1980, regardless of which government was in power.
- However, since the start of economic reforms in 1991, this tendency has changed. India has had robust growth of more than 6.5 percent over the previous 20 years, and it is projected that this growth would last for a further 10 to 15 years.
Concerns about inflation and economic expansion:
- India is still feeling the effects of inflation on this front.
- Consumer price index (CPI) inflation in February was 6.44 percent, just above the RBI’s tolerance range.
- It is crucial to note that the rate of inflation at the moment is evenly distributed over a number of different commodity groupings, with fuel and lighting (energy) leading the pack at 9.9%, followed by apparel and footwear at 8.8%, prepared meals at 8%, and food and beverages at 6.3%.
- Yet, since food and drink account for the majority of the CPI (45.9%), which affects the poor the most, it is crucial to keep it under check.
- Our food inflation is mostly a supply-side issue, and further tightening monetary policy may not be sufficient to halt inflation.
Study of the impact of high retail inflation on food inflation:
- Let’s look more closely at the inflation of food. Inflation rates for cereals range from 16.7% to 25.4% for wheat/atta (non-PDS).
- Despite the fact that this is concerning, PDS Supply has given free cereal to more than 800 million people, so there is no reason to be concerned (5kg per person each month).
- Anyhow, raising the repo rate won’t change anything. To prevent food inflation, it is preferable to implement buffer stockpiles and trade rules.
- The Food Corporation of India (FCI) has already sold approximately three million metric tonnes (MMT) of wheat to reduce mandi prices, which have decreased from over Rs 2,700-2,800 per quintal two months ago to roughly Rs 2,200-2,300 per quintal today.
- The reason of concern is milk inflation, which is disturbingly high at 9.6% and has a significant impact on the CPI.
- India produced the most milk in FY22, with 221 MMT. More valuable than rice, wheat, all varieties of legumes, and sugarcane combined is milk.
- Even though some individuals in the milk industry believe that the government’s estimates of milk production are not very reliable, similar to how they did for wheat production the year before, I believe that trade policy should be the preferred course of action rather than monetary policy from the perspective of inflation.
- Another commodity with a high inflation rate is spices; jeera is up 39% and dry chilies are up 33%.
- Using trade policy to reduce import tariffs from their current range of 30 to 60% to roughly 15% is the solution once more.
Conclusion:
- The fact that the three key vegetables—tomatoes, onions, and potatoes—are not causing any issues must also be welcomed by RBI.
- Their inflation rate is less than zero. Onion growers are vehemently criticising the occasional decline in onion prices.
- In order to increase price discovery, it is essential to provide huge quantities of onions to bulk consumers including the military, hospitals, hostels, hotels, and restaurants.
