INFLATIONARY MENACE

 When global institutions like World Bank  slashed India's GDP growth projection from 8.5% to 7.5% for 2022-23,OECD projected 6.9% and Reserve Bank of India estimated it to be 7.2% mainly due to inflationary pressures and global economic conditions.After recording the strongest GDP output  growth among  the G 20 nations in 2021-22, the Indian economy is progressively losing momentum as inflationary  expectations remain elevated due to rising global energy,food and commodity prices,monetary policy normalisation and emerging geo political tensions due to Russia Ukraine war.According to RBI estimate assuming normal monsoons and crude oil price of India basket of $105 per barrel inflation based on consumer price index was projected above tolerance limit in 2022-23 at 6.7%, with in Q1 at 7.5% ,Q2 at 7.4% ,Q3 at 6.2% and Q4 at 5.8% with risks evenly balanced.About 75% of the increase in inflation projections could be attributed to the food group.The recent spike in tomato prices were adding  to  food inflation. RBI'S monetary policy committee's (MPC) decision to increase repo rate(the interest rate at which RBI lend money to  commercial banks) by another 50 basis points to 4.90 percent after a 40 basis point hike last month is a measure to slow down inflation that estimated to average 7.5% in the current April June Quarter. MPC decided to remain focused on the withdrawal of accommodation which had been provided to support the Covid19 hit economy,to ensure that inflation remains within the target while further supporting growth.But inflation has consistently increased much beyond the upper tolerance level. With no resolution to war in sight and the upside risk of inflation,according to MPC a prudent monetary policy would ensure that the second round effects of supply side shocks on the economy are contained and  long term inflation expectations remain firmly anchored and inflation gradually aligning close to target. In addition to repo rate RBI has also increased reverse repo rate to 3.35%, standing deposit facility SDF rate to 4.65% ,marginal standing facility MSF rate 5.15%, Bank rate 5.15% and reserve ratios -cash reserve ratio CRR 4.5% and statutory reserve ratio SLR to 18% .

For controlling inflation further  rate hikes cannot be  ruled out. The persistence of Russian Ukraine war  and Demand -  supply imbalances led to globalisation of inflation. Central banks all over the world are reorienting and recalciberating their monetary policies to address inflation. Emerging market economies were facing bigger challenges from increased market turbulence and also impacted by monetary policy shift in advanced economies and their spillovers. According to RBI during these difficult and challenging times Indian economy has remained resilient, supported by strong macro economic fundamentals and buffers, RBI would continue to be proactive and decisive in mitigating the fall out ongoing geopolitical crisis of the economy. 

Prevailing tense global situation impacted considerable uncertainty to domestic inflation outlook. Hence GDP growth forecast for 2022-23 has been reduced by RBI to 7.2%.with 16.2% in Q1,6.2% in Q2,4.1% in Q3, and 4.0% in Q4,assuming the risks broadly balanced. For clouding inflation outlook MPC has listed  factors like the war in Ukraine and the consequent elevated commodity prices, the heat wave of stunting rabi crop output, high edible oil prices, crude prices that continue to pose a persistent  risk to domestic pump prices of fuels, increase in electricity tariffs, and, crucially, manufacturing and service firms flagging input and output price pressures. 

Interest rate hike is one step adopted by central banks through out the world to contain inflation menace.It is obvious that if interest rates are hiked it cools down inflation by slowing down the economy . Demand is going down out of the particular inflationary shock has been caused by things like food and fuel, those are not  highly sensitive to interest rate.Economic growth is little more sensitive than food and fuel.Government's policy measures like cut in taxes of fuel and energy prices ban on exports of some items also impact the economy .

RBI'S priority is to control inflation over growth so that the level of price rise remains within target without affecting growth.Despite the Russia Ukraine conflict disrupting the global supply chain, India's external sector remains healthy because of robust foreign exchange reserves and sustainable normal capital flows as against increasing trade deficit and current account deficit.April -May  quarter which recorded high trade deficit of $43.7 billion  with soaring oil and commodity prices are expected to push current account deficit to grow further in financial year 2023 to almost double between 3 to 3.5% of GDP. Normally annual GDP growth rate below 2.5% can be considered recessionary.When the World Bank itself is projecting 2.9% in  global GDP growth recessionary clouds are clearly visible.In such a scenario Government has to be proactive specifically in the case of providing food, fuel and edible oil at reasonable prices by adopting appropriate policy measures whereas RBI should continue to focus on inflation control.