Is the RBI helpless to combat inflation?

Is the RBI helpless to combat inflation?

Retail inflation in India increased to 7.4% in September, up from 7% in August, according to the Consumer Price Index. Food price increases fueled this growth.

Food inflation, which accounts for roughly 40% of the CPI basket, reached a 22-month high of 8.6%, according to data issued by the National Statistical Office.

The most recent figure underscores the Reserve Bank of India’s difficulties in bringing inflation within its medium-term objective of 4%, with a two percentage point spread on either side.

Inflation has now been over the RBI’s upper tolerance range of 6% for three straight quarters. According to the RBI Act, the central bank must submit a report to the central government stating why it did not reach the inflation target and what efforts it will take to reduce price increases.

For the first time since the implementation of the inflation-targeting Monetary Policy Framework in August 2016, the RBI is experiencing such a result.

Last month, RBI Governor Shaktikanta Das stated that the central bank regards the communication to the government about missing inflation objectives as privileged communication and will not make it public.

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Inflation had surpassed its goal for more than three-quarters of the time during the pandemic. Still, a technological flaw in data collection, in which data was obtained without visiting the mandis due to the lockdown, helped ensure that the RBI did not have to provide such an explanation at the time.

Since May, the RBI’s Monetary Policy Committee has hiked the repo rate by 190 basis points to 5.9%, and economists expect it to boost rates by at least 25 basis points at its next meeting in the first week of December.

The late withdrawal of the monsoon and strong rain spells experienced in several states have impacted the pricing of perishables, particularly vegetables.

Spices, with 16.9% inflation, contributed to broad-based food price pressure. Veggie costs grew 18.05% year on year in September, while cereal prices increased 11.53%.

Clothing and footwear costs grew by 10.17%, while gasoline and electricity prices increased by 10.39%, remaining above 10% for the fourth month.

This season, actual rice-producing states, including Uttar Pradesh, West Bengal, and Jharkhand, experienced deficient rainfall, hurting paddy seeding and expected output. This year, the rupee’s 10% depreciation has increased the cost of imports for consumers and businesses.

Meanwhile, industrial output fell 0.8% in August after rising 2.2% in July. According to QuantEco research, the slowdown seemed to be broad-based, with substantial drag in consumption-oriented production even as investment-oriented show has lost speed in recent months.

The International Monetary Fund lowered its growth prediction for India to 6.8% in 2022-23 on Tuesday.

According to Vivek Kumar, Economist at QuantEco Research, food and gasoline accounted for 62% of September inflation. They are generally unconcerned about interest rates. We anticipate that the MPC will raise rates by 35 basis points in December. Rate increases take 2-4 quarters to become effective.

The RBI’s toolkit is restricted because the inflation print is highly influenced by unpredictable food prices, which have recently been affected by global development. As a result, the central bank’s efforts must be supplemented by additional government actions on non-essential food and fuel goods. Failure to do so will tarnish India’s reputation for regulating inflation.

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