The most vulnerable sections of society are bearing the brunt of high inflation

The rate hike of 50 basis points, or 0.5 per cent, by the Reserve Bank of India was along expected lines. This means that now the repo rate would be 4.9 per cent. Repo rate is the rate at which a central bank lends money to commercial banks to meet any shortfall of funds. This comes after last month’s unscheduled hike of 40 bps. The RBI has been forced to adopt a hawkish stance because of the growing inflation; the situation made worse by the ongoing war in Ukraine. What is worrying is that even a rise of 90 bps in a span of five weeks is not expected to rein in prices. The central bank has pegged inflation for 2022-23 at 6.7 per cent, which is much beyond its comfort range of 2-6 per cent. The six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously opted for the latest rate hike on Wednesday. “Upside risk to inflation persists; a recent spike in tomato, crude prices fuelling inflation,” said RBI Governor Shaktikanta Das. “Inflation likely to remain above 6 per cent in first three quarters of current fiscal,” he said. “Our steps will be calibrated, focused on bringing down inflation to target level.” That’s sensible, for the brunt of high inflation is being faced by the most vulnerable sections of society. There’s a feeling that the RBI waited for too long to increase rates. Inflation has been rising for quite some time but the central bank chose to downplay the rise in prices, even those of food items which hurt the poor the most.

The MPC said that considerable uncertainty surrounds the inflation trajectory due to global growth risks and geopolitical tensions. “The supply side measures taken by the Government would help to alleviate some cost-push pressures. At the same time, however, the MPC notes that continuing shocks to food inflation could sustain pressures on headline inflation. Persisting inflationary pressures could set in motion second round effects on headline CPI.” This, it said, necessitated calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures. It needs to be mentioned here that a central bank’s role in containing inflation is limited; a lot depends on economic policy in general, especially the taxation regime. The Union Government’s supply side measures have been many and varied, from encouraging private investment, including foreign direct investment, to public asset monetisation and privatisation to tax cuts of petroleum products. Unfortunately, not every State Government has reduced taxes on petrol and diesel. Lower tax on fuel will not only help lower inflation but also increase economic activity. A lot more needs to be done, both by the Centre and the States. Deregulation in various sectors needs to be speeded up. This will give a boost to the private enterprise which, in turn, will give a fillip to economic growth and generate jobs.