Contents:

  1. Even as inflation remains elevated, pivot towards normalisation of monetary policy is likely to be slow and measured

Even As Inflation Remains Elevated, Pivot Towards Normalisation of Monetary Policy is likely To Be Slow and Measured

Context:

While it’s still early days to accurately assess the impact of the third wave of the pandemic on the Indian economy, as the economic recovery continues to remain uneven, the pivot towards the normalisation of monetary policy is likely to continue to be cautious.

Relevance:

GS Paper – 3: Growth & Development, Monetary Policy

Dimensions of the Article:

  1. Data from National Statistical Office
  2. What are the reasons?
  3. Rising Inflation
  4. Way Forward

Data from National Statistical Office:

  • Data released by the National Statistical Office on Wednesday showed that retail inflation, as measured by the consumer price index (CPI), rose to a six-month high of 5.6 per cent in December 2021.
  • Consequently, inflation in the third quarter was  about 5 per cent, marginally lower than the estimate of 5.1 per cent projected by the Monetary Policy Committee (MPC).
  • Inflation is likely to inch upwards in the months ahead due to a combination of factors.

What are the reasons?

  • First, the base effect is likely to remain unfavourable in the last quarter of the financial year.
  • Second, with producers increasingly facing cost pressures — the wholesale price index has remained elevated, witnessing a record high of 14.2 per cent in November — they are likely to pass on the burden of rising costs to end consumers.
  • And third, the possible disruption in supply chains, due to the imposition of restrictions on activities by state governments, could also push prices up.
  • The central bank also expects inflation to rise.

Rising Inflation:

  • The disaggregated inflation data shows that food and beverages inflation rose to 4.5 per cent in December, up from 2.6 per cent the month before.
    • This surge was largely on account of cereals, vegetables and milk.
  • Worryingly, core inflation, which strips away the volatile components, continues to remain elevated, even as the first advance GDP estimates released by the National Statistical Office suggest muted private consumption in the second half of the financial year.
  • Inflation in clothing and footwear, recreation and household goods and services remains elevated. As does health inflation.

Way forward:

  • It is still early days to accurately assess the impact of the third wave of the pandemic on the Indian economy, as the economic recovery continues to remain uneven, the pivot towards the normalisation of monetary policy is likely to continue to be cautious.
  • While the RBI has begun to take steps on liquidity, considering the continuing economic uncertainty, the central bank may rethink or push back the timelines for the next policy steps which involve
    • hiking the reverse repo rate,
    • shifting the stance of monetary policy from accommodative to neutral, and
    • hiking the repo rate.

-Source: Indian Express

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