India’s inflation, which is measured by the Consumer Price Index (CPI), has stayed above the Reserve Bank of India (RBI)’s upper tolerance limit of 6% for three months running. The central bank’s monetary policy committee decided to hold benchmark interest rates earlier this month, choosing to remain accommodative “while focussing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. Western economies such as the U.S. have begun raising interest rates. Is the RBI doing enough to arrest inflation? Ananth Narayan and Lekha S. Chakraborty discuss the question in a conversation moderated by K. Bharat Kumar. Excerpts:
Is the RBI behind the curve in reining in inflation?
Lekha Chakraborty: There needs to be a fundamental rethink on the efficacy of the inflation targeting framework itself. The crucial question is: are we able to anchor inflationary expectations properly? The sole mandate of the RBI is to look into price stability. So, now, what do we do? Do we revise the nominal anchor from the stated 4%? Or do we play around with that band plus or minus 2 percentage points? Or are we going to throw away this framework and adopt a prior inflation targeting framework? Having said that, the context here is important. Inflation is mounting. There is geopolitical uncertainty. The war in Ukraine led to supply-chain disruptions. Consignments are getting delayed. So, it’s a supply-side shock. Manoeuvring with repo rate adjustments to contain inflation may not work. The reverse repo rate itself is likely getting redundant, because they have introduced a new tool — the standing deposit facility rate at 3.75% — to absorb excess liquidity. That’s a smart move, to work with the monetary policy corridor, but leave the rates untouched.
