Retail inflation in April surged to an eight-year high of 7.8 percent on the back of a sharp uptick in food and fuel prices, raising fears that the Reserve Bank of India (RBI) will hike rates more aggressively in its next policy meet in June.
Retail inflation has now remained above the RBI’s upper tolerance band of 6 percent for the fourth consecutive month. It was at 6.95 percent in March, 6.07 percent in February, and 6.01 percent in January.
Inflation can be hard to tame. The RBI is taking all possible measures, though, in the end, it may let the exchange rate adjust gradually to the new global and domestic macro realities, said Madhavi Arora, Lead Economist, Emkay Global Financial Services in an interview with Abeer Ray of MintGenie. She added that the RBI would in all likelihood control the demand side of the economy to contain the risks associated with inflation.
Q. Do you think RBI hiking interest rates to 5.15 per cent will help tame inflation?
The consistent pressure on input costs amid higher global commodities has pushed core inflation well above seven per cent. Overall, rising price pressures remain a policy concern and are likely to push the Monetary Policy Committee further. The triple whammy of commodity-price shocks, supply-chain shocks and near-resilient growth has shifted the reaction function in favour of inflation containment. To a large extent, the inflation issue is still global supply-driven and the Reserve Bank of India will likely be able to tame the demand side of the economy to reduce inflation entrenchment risks.
Q. The rupee is also hitting record lows. Between rupee, inflation and foreign exchange, how should RBI manage the three?
There will be no easy policy choices for the RBI this year. The macro adjustment owing to a change in global and domestic dynamics (US rates repricing, Brent surge, sharp FPI outflows, twin deficit, etc.) has so far been borne by the rates market in the early part of CY22, while the exchange rate market until recently has been resilient. This anyway risked a catch-up impact on the foreign exchange market in the coming months. This however would also imply the blow-up in the rates market could ease.
However, a sharp volatile move in INR (be it depreciation or appreciation), helps no real sector economic agent (exporters or importers) in the immediate run and thus requires policy support to ensure volatility is smoothened. Even as the RBI may continue to intervene to smoothen volatility, it may let the exchange rate adjust gradually to the new global and domestic macro realities and let it act as a natural stabilizer to growth and policy reaction functions.