Indian economy: Responding to India’s fragile recovery

As inflation overtakes the mandate given by Parliament to the Reserve Bank of India (RBI), Governor Shaktikanta Das has outlined steps taken to reverse monetary policy that led to an unanticipated rate hike earlier this month- this. The central bank must respond to lawmakers if inflation persists above 6% for three consecutive quarters. Current indications are that inflation based on the consumer price index (CPI) is unlikely to return to the 2-6% range by June, when the two quarters of the target overshoot will be exceeded. . But the circumstances were extraordinary and the RBI’s response was not delayed. As the GoI partakes in the export restrictions and food and fuel duty reductions which are driving the current phase of high prices, the RBI’s Monetary Policy Committee (MPC) may be able to flatten the curve of rising interest rates to achieve price stabilization.

Das noted in an interview with this newspaper last week that the RBI’s rate action in May was keen not to derail the economic recovery. Both the ramp-up of the 40 basis point (bp) increase in the repo rate and the quantum of change were driven by the intention not to add another shock after the pandemic and the war in Ukraine. Looking ahead, Das sees a sunset on the RBI’s rate hike cycle, which could be accelerated by supportive fiscal policy and changes in the external environment. In this, the governor is following a tradition among central bankers of driving down prices when inflation becomes


India is more connected to the global economy than it was a decade ago, and imports both inflation and recession faster. The RBI’s monetary response is constrained by political actions in advanced economies and the growth prospects of the global economy. By appearing less hawkish than his peers in other countries, Das is responding to India’s fragile recovery from the pandemic and a new set of vulnerabilities emerging from a global food and energy crisis. The burden of these will be borne inordinately by the poor of the world.

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