scorecardresearch
RBI needs helping hand from Centre, states in fighting inflation

RBI needs helping hand from Centre, states in fighting inflation

The government believes that a cut in cess or excise duty will not have any major impact on retail inflation numbers because of low weightage in CPI basket.

Despite inflationary pressure, the RBI is expected to keep the repo rate unchanged at 4.0 per cent during its third monetary policy review this year on Friday. Despite inflationary pressure, the RBI is expected to keep the repo rate unchanged at 4.0 per cent during its third monetary policy review this year on Friday.

The Reserve Bank of India (RBI), which is standing strong by the side of the government in keeping interest rates low to support growth, is not getting enough support from the Central government as well as states in reducing cess and excise duties to ward off input cost pressures coming from petrol and diesel prices.

The rise in international commodity prices, especially crude oil, is fueling inflationary pressures. In the last year, crude oil prices have shot up from a low of $20 per barrel to USD $70 barrel. This has pushed domestic prices to over Rs 100 per litre.

However, the government believes that a cut in cess or excise duty will not have any major impact on retail inflation numbers because of low weightage in the overall CPI basket. While the share of fuel price in retail inflation or consumer price index (CPI) is indeed low, cost pressures in food and other items are also coming from logistics or transportation costs.

Retail inflation has already crossed the RBI's upper band of 6.0 per cent for the two months of May and June this year. CPI shot up to 6.30 per cent in May and 6.26 per cent in June.

The RBI's monetary policy committee (MPC) has a mandate to keep inflation at 4 per cent, with 2 to 6 per cent as the lower and the upper tolerance limit, respectively. RBI's own projection for CPI is 5.1 per cent for the entire year 2021-22.

Despite inflationary pressure, the RBI is expected to keep the repo rate unchanged at 4.0 per cent during its third monetary policy review this year on Friday.

Also Read: Thrasio model: The new mantra in the Indian startup ecosystem

In the June meeting, the six-member MPC had decided unanimously to "continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward."

The policymakers are clearly in support of growth even when inflation has breached the 6 per cent mark. Chief Economic Advisor (CEA) Krishnamurthy Subramanian recently went on record saying that the government expects CPI inflation for July month to be lower than 6 per cent.

RBI Governor Shaktikanta Das, too, is not perturbed by the sudden spike in inflation. He recently said that "it is not like any other (normal) year when inflation goes up, and you start tightening the monetary policy."

So far, the inflation analysis of RBI, as well as MPC, also points to the fact that the retail inflation is not persistent. "Inflation will turn persistent when it is backed by demand-pull," said Dr. Michael D. Patra, RBI's Deputy Governor during June's policy meeting. The central bank has been saying that COVID-19 has created a supply-side disruption, which is pushing inflation.

Patra, who is also one of the six MPC members, said that at the current stage, the demand is very weak and there is no demand-pull in the inflation formation. "But we are very, very vigilant about demand pressures. And, we will keep on monitoring as and when demand pressures start feeding into the inflationary process," said Patra.

Also Read: Vandalism at Mumbai airport: Branding in compliance with govt norms, says Adani Airport