Interest rate increases to stem rising prices could, however, dent fledgling demand recovery: official
Interest rate increases to stem rising prices could, however, dent fledgling demand recovery: official
Inflation is now the biggest challenge for India’s policy makers rather than the U.S. Federal Reserve’s taper programme and measures like interest rate increases to stem rising prices could dent the fledgling consumption demand recovery from the pandemic not just in India but globally, a senior official said on Wednesday.
The NSO is set to release April retail inflation data on Thursday. Inflation measured by the Consumer Price Index had surged to 6.95% in March, the third month in a row that it had stayed above the RBI’s upper tolerance threshold of 6%, and most economists expect the pace of price increases to quicken in April.
“The biggest fear right now is inflation and we have started to tackle it,” the official involved in monitoring the economy said, speaking on condition of anonymity. In an off-cycle move last week, the RBI raised key interest rates by 40 basis points while retaining an accommodative policy stance citing rising price pressures.
“The nearly 7% inflation print for March came four days after the RBI review, then came Indonesia’s decision to ban edible oil exports and the escalation in sunflower oil and coal supply constraints. Inflation was high in manufactured goods earlier, weak in contact-intensive services, but now it is food and crude inflation and is spreading across goods and services as producers are no longer able to hold off transmission of input costs,” the official noted.
“All central banks are going to do their best to drive inflation down but, in the process, they run the risk of driving down whatever little demand is there, post-pandemic,” the official said.
“Currently, the inflationary forces that are hitting us and the rest of the world are outside everyone’s hands and three quarters of the items in our Consumer Price Index are at risk due to the war in Ukraine, so the room for doing too much is limited,” the official said.
‘Stagflation scenario’
Globally, stagflation had moved from being a risk scenario to a baseline scenario, the official added.
While the RBI Governor had been nudging the Centre and States to cut taxes on petrol and diesel to ease inflationary pressures, the official noted that the spurt in global fertiliser prices would push up subsidies sharply.
“It’s a difficult trade-off to make. If excise duty on petroleum products are cut by say ₹5 a litre and higher borrowings are resorted to, for funding the fertiliser subsidy bill, it will push up the fiscal deficit as well as yields on government debt even more,” the official pointed out.