Bikky Khosla | 15 Jun, 2021
Inflation figures released last week came as an unpleasant
surprise. Wholesale inflation rose by
12.94 percent in May from a rise of 10.49 percent in April. This is the highest
rate of WPI inflation in the current series. Retail inflation, on the other
hand, rose to 6.30 percent from 4.23 percent in April. No doubt, these figures
are high, limiting RBI’s scope for further monetary accommodation while
highlighting the importance of fiscal support to the Indian
In its second MPC meeting for this
fiscal, the central bank hold its key policy rates, while emphasising on an
accommodative stance as long as required to support the economy. But a latest
report views that with inflationary concerns still hovering, monetary supports have
reached their ‘limits’. It adds that RBI will face a multiplicity of challenges
to reinvigorate growth and support a stable rupee and a potential inflation
uptick. These concerns sound quite logical, particularly now after release of
the May inflation data.
It has also been pointed out that RBI
has recently taken several measures to push credit offtake, but the effort
failed to garner much result as corporates have deleveraged by repaying
high-cost loans through funds raised through bond issuances. Also, corporate
willingness for new investments remains low among all-pervasive uncertainty. Therefore,
the report adds, only fiscal policy can rekindle animal spirits at this
juncture - monetary policy has almost nil headroom.
Monetary policy works mainly through banks, but with a
clear lack of appetite for investment in the private sector, only monetary
interventions seems to have a limited role to play during this period. Therefore,
the Centre, according to experts, should come out with a comprehensive fiscal package
to support the industry, with a focus on the small and medium enterprise
sector, which has been taking the brunt of the pandemic.
I invite your opinions.