17 Feb The RBI’s forecasts of inflation and its mandates
The RBI’s forecasts of inflation and its mandates- Today Current Affairs
The inflation in India in terms of consumer price index (Combined) reached 6.01 percent in January which is breaching the tolerance band of 2 to 6 percent of CPI combined. RBI had forecast the acceleration and it would be no surprise for many but RBI must be cautioned now, looking into the breaching numbers.
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The Hinterland with its greater proportion of the country’s poor, bore the brunt of rising food prices. The rural food price inflation has gone up to 5.18% in January from 3.39 percent in December.
The central bank in its February Monetary Policy has retained the status quo and kept the repo rate unchanged at 4% in order to support economic growth.
The RBI Governor Shaktikanta Das has defended the higher headline inflation in the current fiscal year by citing the base effect. The Hindu Analysis.
(what is base effect: This is to understand that when the base is high, the growth percentage will be coming as low. Similarly when the base is low the growth percentage will be coming as high. Because generally growth is calculated on the basis of percentage and the percentage whether will remain high or low very much depends upon the base.)
For the financial year 2022-23 The RBI has projected inflation to Slow down to 4.5%.
Global crude oil prices witnessed a seven year high earlier this week given the uncertainty over the Ukraine Russia tensions, which could unravel the RBI’s inflation projection.
The inflation in the sector of transport and Communications which reflects the retail fuel prices even after slowing down from December, was still at 9.36 % in the month of January.
Given the election season and the cuts announced in Central and state taxes on petroleum, prices at the pump have stayed static for a while. The Center may soon have to allow oil sellers to pass on the global price increase to consumers, which could spur the inflation further.
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The Households Expectation Inflation Showing inflation rate than RBI’s projections of CPI (combined). This can affect the private consumption expenditure which is still lagging behind the pre-pandemic level of financial year 2019-20, As per the NSO’s Advance Estimates of GDP growth. If the private consumption expenditure comes down auto off expected highest inflation, it could challenge the RBI’s objective of holding down interest rates to support growth. As price stability should always remain the prime focus of any Central Bank, the RBI must look into the recalibration of its inflation projections and into the change in policy stance so as to fulfill its mandate.
Inflation as an important indicator of an economy : Inflation is defined as the average increment in prices of goods and services. The rate of inflation should not be very high as well as should not be very much low. High inflation affects the poor more because the marginal utility of money for them is high. So a high rate of inflation should not be favorable for any economy because even if there is no absolute poverty in any country, it will be having relative poverty for sure. For a country like India which is having a sizable population of absolute poor, higher rate of inflation should never be persisting. The hindu Analysis.
At the same time if inflation goes negative (which is called deflation) the economy can face slow down, recession or depression. Actually in case of deflation, The producers in the economy do not go for higher levels of production or say they slow down the production, as they assume the deflation is a sign of reducing demand. And when demand is decreasing nobody would be taking risks by producing more. The Economy can witness slow down because of the action or better to say inaction of producers. Hence the tolerable Band of inflation is kept between 4 to 6% in terms of CPI combined. If the RBI and the monetary policy committee is successful in keeping the inflation rate between 4 to 6% then it will be said that we are having macroeconomic stability (in terms of inflation).
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