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RBI can argue its case for not curbing inflation
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IANS | 30 Oct, 2022
The Reserve Bank of India (RBI) can argue its case strongly with the
Central government as to why the inflation was not controlled at 4 per
cent, said experts.
The RBI's Monetary Policy Committee
(MPC) will meet on November 3 to discuss what it would tell the Centre
as to why it was not able to restrain the inflation.
The RBI may
also sound out the Central government as to the course of inflation as
well as the reasons as to why it may be at the elevated levels.
In India, the retail inflation rose to 7.41 per cent in September.
Experts
were of the view that a combination of global and local (glocal)
factors -- geopolitical developments, crop production, reduction in
crude oil production and the resulting price increase and depreciating
rupee -- are expected to heat up the prices.
The RBI on its part is trying to contain the inflation by increasing the repo rate -- the rate at which it lends to the banks.
The
central bank has increased the repo rate by 190 basis points in recent
times and the last one was by 50 basis points last month.
"There
is a strong case for the RBI arguing that (a) inflation has primarily
been caused by supply side shocks with global commodity prices having an
impact (b) rupee depreciation has added to imported inflation (c) the
RBI on its part was proactive in raising rates even between two policies
as it did in May when it saw things were going out of hand post Ukraine
war and (d) there have been some measures like increase in goods and
services tax (GST) which has added to inflation that was happening in
parallel," Madan Sabnavis, Chief Economist, Bank of Baroda, told IANS.
"Therefore,
there is an explanation as to why inflation was high. But the central
bank has been acting to bring it down through the instruments it has
like repo and CRR (cash reserve ratio). It has succeeded in lowering
surplus liquidity too which can be proved," Sabnavis added.
"The
RBI can say that inflation is due to supply side constraints a nd excess
liquidity," says K. Ramasubramanian, retired General Manager, RBI, and a
forex advisor.
"In addition, there was a huge sale of forex
almost Rs 3 lakh crore to maintain the exchange rate. Inflation which
was more than the target continuously for three quarters is estimated to
come around 6 per cent by three more quarters. Interest rates (repo
rate) have been increased almost 1.9 per cent. As such the MPC may only
be constrained to say that the present steps taken need some more time
for having a positive impact to reduce inflation. This is subject to the
time inconsistency impact," he added.
The RBI has scheduled the
November 3 meeting of MPC under Section 45ZN of the RBI Act. As per the
said Section, when the RBI fails to meet the inflation target, it shall
send a report to the central government listing: (a) the reasons for
failure to achieve the inflation target; (b) remedial actions proposed
to be taken by it; and (c) an estimate of the time-period within which
the inflation target shall be achieved pursuant to timely implementation
of proposed remedial actions.
As per the RBI Act the MPC shall determine the Policy Rate required to achieve the inflation target.
Further as per the RBI Act, the central bank shall organise at least four meetings of the MPC in a year.
Announcing
the credit policy RBI Governor Shaktikanta Das said: "There are also
upside risks to food prices. Cereal price pressure is spreading from
wheat to rice due to the likely lower kharif paddy production.
"The
lower sowing for kharif pulses could also cause some pressures. The
delayed withdrawal of monsoon and intense rain spells in various regions
have already started to impact vegetable prices, especially tomatoes.
These risks to food inflation could have an adverse impact on inflation
expectations."
According to the RBI Governor, the Indian basket
crude oil price was around $104 per barrel in H1:2022-23 and expected to
be around $100 per barrel in H2: 2022-23.
"Taking into account
these factors, the inflation projection is retained at 6.7 per cent in
2022-23, with Q2 at 7.1 per cent; Q3 at 6.5 per cent; and Q4 at 5.8 per
cent, with risks evenly balanced. CPI (consumer price index) inflation
is projected to further reduce to 5.0 per cent in Q1:2023-24," Das said.
However,
one has to see the RBI's prediction as to crude oil prices ($100 per
barrel) as the oil producing countries have announced a cut in their
production and the international prices going up.
Economists and common man have a different take on the RBI's expectations on inflation.
"Presently
inflation does appear unlikely that it will move downwards for two sets
of factors. The increase in oil price and rupee depreciation has
potential to increase imported inflation," Sabnavis had told IANS
earlier.
"Second, there have been some shortfalls in kharif
production which will mean an increase in prices. Also the late
withdrawal of rain has affected vegetable crops and also adversely
affected the harvest of rice and oilseeds in some regions."
The reduction in sown area for rice and pulses during Kharif season is expected to feed inflation in the coming months.
The
overall sown acreage for the Kharif season has declined by 0.8 per cent
at the end of September 30, 2022 as compared to last year, the Bank of
Baroda said in a recent report.
"The inflation rate will be 6.5-7 per cent in FY23 and 5.5-6 per cent in FY24," Sabnavis had remarked.
The
RBI Governor had said the communication with the central government is a
privileged one and it will not made public by the Bank.
Das also said there no legal stipulation on the frequency of the communication between RBI and the government.
He
had earlier said the inflation rate is expected to come down to four
per cent in two years time. There are many uncertainties.
The RBI has pegged the inflation rate at 6.7 per cent for FY23.
(Venkatachari Jagannathan can be reached at v.jagannathan@ians.in)
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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66.20
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64.50 |
UK Pound
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87.50
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84.65 |
Euro
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75.65 |
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56.85 |
As on 13 Aug, 2022 |
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