By Satish Singh
Six members of the Monetary Policy Committee (MPC) have collectively decided to keep the policy rates unchanged. Thus, the repo rate will remain at 4 percent and the reverse repo rate at 3.5 percent till the next monetary review. This is the seventh time in a row that the MPC has not changed the policy rates. The MPC has long adopted a soft stance to boost the pace of development. Since the inflation is rising and the borrowing from banks is low due to the corona pandemic, therefore, the MPC has kept the policy rates unchanged.
It is not that there has been no change in the repo rate despite the increase in inflation rate only in India. Right now, the inflation rate is increasing globally. Nevertheless, policy rates are not being cut in most countries of the world. The Fed rate in the US, which is similar to India’s repo rate, has remained at the level of 0.25 percent since March 2020. In the UK too, the repo rate there was 0.75 percent in January 2020 and is still at 0.1 percent. There has been a slight increase in it. In the Eurozone, the repo rate there has remained at the level of zero percent since the year 2016.
At present, the condition of the economy remains scrawny in India as well as in developed countries, due to which the pace of development is not accelerating at the global level. Even in developed countries, the unemployment rate has not yet returned to the pre-corona period. Like India, the reason for the increase in the inflation rate abroad is due to the disruption of the supply chain, the immediate cause of which is the corona pandemic. However, as the pace of vaccination is increasing, the supply chain barriers are now gradually being removed.
Today inflation is mounting in India as well as in developed countries of the world. In June, the inflation rate in the US was 5.4 percent, while it was 0.5 percent in the UK and 1.9 percent in the euro zone. Nevertheless, these countries did not increase policy rates to control inflation. These countries believe that inflation is not going to be permanent. Its factors are transient and the inflation rate will come down very soon.
However, the reason for the rise in inflation is also the surge in the prices of goods. Core inflation remains bullish. This does not take into account the fluctuations in the prices of food and fuel. Core inflation estimation does not take into account items that are outside the traditional patterns of demand and production in an economy, such as a decrease in production due to environmental problems. To understand inflation, it is important to comprehend headline inflation as well. For its calculation, such figures are being included, which are the basis of CPI calculation. Headline inflation also includes fluctuations in food and fuel prices.
Base effect is also a major reason for the increase in inflation. The effect on the outcome of the comparison due to the selection of different reference points for comparison between two data points is called the base effect. Significantly, the International Monetary Fund (IMF) in its economic outlook released on July 21 had considered the base effect as a factor in inflation.
In May 2021, the inflation rate had augmented to 6.3 percent. However, it declined marginally in June and came down to 6.26 percent. In the last monetary review, which was held in the month of June, the central bank had projected the CPI to be 5.1 percent during the financial year 2021-22 and 5.4 percent during July to September 2021. Since the inflation rate was high during the last monetary review also, there was no change in the policy rates at that time too.
For the time being, the chances of inflation coming down are wiry. Therefore, the central bank has revised the estimate of Consumer Price Index (CPI) for the current financial year from 5.1 percent to 5.7 percent. According to RBI Governor Shri Shaktikanta Das, the rise in inflation in May was a bit unusual as overall demand was showing improvement at that time, but inflation did not come down due to higher oil and food prices. Therefore, the Governor of the Reserve Bank is of the view that rationalization of oil prices may bring down the CPI figures.
In view of the current economic scenario, the central bank has revised the GDP growth forecast for April to June 2021 quarter to 21.4 percent, July to September 2021 to 7.3 percent, October to December 2021 to 6.3 percent and January to march 2022 to 6.1 percent.
According to the Governor of the Reserve Bank, Shri Shaktikanta Das, there is still a need to take several steps to maintain the balance between demand and supply in most of the sectors. Also, the possibility of the arrival of the third wave of the corona pandemic still cannot be ruled out outrightly. To deal with this, proper preparation and taking utmost precautions are necessary. However, Mr. Das also believes that the overall economic condition of the country has improved.
Since the year 2020, the negative effect of the corona pandemic is being seen in all the countries of the world. Due to this, the economy of all the countries has been devastated and to revive the economy, the governments of all the countries have announced a relief package according to their capacity.
The Reserve Bank believes that urban demand will improve in the coming days. Private consumption is also increasing in the rural sector and it is expected to improve further in the coming months. However, crops and vegetables have been destroyed due to floods in many states of the country and oil prices are also not expected to come down for the time being. The festive season is also starting from September, due to which the number of corona infected patients is expected to increase. In such a situation, there is less chance of inflation coming down for the next few months. Also, due to supply chain disruptions and rising unemployment rates, the likelihood of a policy rate cut in the upcoming monetary reviews is slender.