Over the last 24 months, the Reserve Bank of India (RBI) has made substantial interest rate cuts of 250 basis points and infused over Rs 12 lakh crore of liquidity to support falling growth. But now inflation is rearing its head. The CPI or retail inflation for October month was at 7.6 per cent, which is much higher than the targeted 4 per cent.
In fact, inflation has been on the rise for last nine months. While RBI continue to take an accommodative stance in monetary policy reviews to support growth, it is now looking up to government to use duties and other measures, while also hoping winter to ease vegetable prices. If pandemic recedes and lockdown restrictions get completely lifted, supply side disruptions will also get sorted to bring down prices.
Here are RBI's five assumptions for keeping the inflation under check:
Winter usually eases food prices
The RBI is now pinning its hopes on winter season when vegetable prices generally ease. There are expectations of lower prices of onions, tomatoes and potatoes. This is likely to bring a big relief as food prices have a high share in the CPI basket. In fact, the major reason for high inflation is the high food prices post pandemic.
Lifting of lockdown to remove supply side disruption
COVID-19 cases are gradually coming down and states are also removing lockdown restrictions. This is good news as supplies would improve and prices also settle at lower levels. The RBI Governor today said that a small window is available for proactive supply management strategies to break inflation spiral being fuelled by supply chain disruptions.
Intervention from government to reduce import duties or indirect taxes
The RBI is also expecting government to intervene to reduce price pressure. Take for instance, the government has recently reduced import duties on edible oil. Similarly, the government also cut import duties on masoor dal. Any duty reduction by government will bring a relief to consumer from high inflation.
Action against hoarders
The RBI for the first time made a mention that "substantial wedge between wholesale and retail inflation points to the supply-side bottlenecks and large margins being charged to the consumer." This is a very big statement that higher margins are being charged by retailers from consumers. The state as well as central government have to come forward to take action against such retailers or hoarders. The government should direct investigating agencies to act against those accused of profiteering.
Scaling down RBI's liquidity tap
The RBI has kept away from infusing more liquidity into the system, though it said it has many tools to step in as and when necessary. As of today, the higher liquidity both in global markets as well as domestic market is finding its way into equity markets and asset prices. The equity markets are at an all-time high. Higher liquidity also has the potential to fuel inflation in the longer run.
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