In a double whammy of sorts for the Indian economy, retail inflation accelerated to 7% in August, while factory output plunged to a four-month low of 2.4%. Official data released on Monday showed CPI inflation climbed to 7% from 6.71% in July and 5.3 % in August 2021, official data released on showed. The inflation rate picked up on the back of a rise in food prices, especially of fruits, vegetables, spices, cereals, wheat, milk and prepared meals, with a higher pace recorded for rural areas than urban areas. In rural areas, inflation stood at 7.15 per cent in August, higher than the inflation in urban areas at 6.72 per cent, with food inflation at 7.6 per cent and 7.55 per cent, respectively. The Index of Industrial Production (IIP) also moderated to a four-month low of 2.4 per cent in July as against a growth of 11.5 per cent a year ago, with tepid growth in manufacturing, mining and electricity. The industrial output contracted from the previous month by 2.75 per cent.
- Inflation Targeting(IT)is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
- The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
- MPC is a statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth.
- The 6-member Monetary Policy Committee (MPC) constituted by the Central Government as per the Section 45ZB of the amended RBI Act, 1934.
- Monetary Policy objectives:
- It is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy.
- In India, monetary policy of the Reserve Bank of Indiais aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
- The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion and through many other instruments.
Challenges before the RBI:
- When it comes to monetary policy, the RBI’s most important mandate is to maintain price stability.
- To this end, the RBI is required by law to maintain retail inflation which is based on Consumer Price Index (CPI) at the 4% level (with a band of variation of 2 percentage point).
- But, another key concern for the RBI is the overall economic growth in the economy.
- However, at the current juncture in the Indian economy, economic growth has decelerated sharply even as inflation has sped up.
- So the challenge before the RBI was to balance the concerns of boosting growth while making sure that inflation does not spiral out of control.
Monetary Policy Instruments and how they are managed?
- Monetary policy instruments are of two types namely qualitative instruments and quantitative instruments.
- The list of quantitative instruments includes Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio, Statutory Liquidity Ratio, Marginal standing facility and Liquidity Adjustment Facility (LAF).
- Qualitative Instruments refer to direct action, change in the margin money and moral suasion.
Rising Inflation over a period of time:
- People with savings suffer in times of inflation as the purchasing power of their savings decreases as price levels rise.
- The real rate of interest (nominal rate less the inflation rate) is reduced in times of inflation.
- Real interest rates may be negative if inflation rate is greater than the interest rate. If so the purchasing power of savings declines. This discourages savings.
- Easy money is when the RBIallows cash to build up within the banking system—as this lowers interest rates and makes it easier for banks and lenders to loan money.
- The latest Consumer Price Index data show retail inflation accelerated by almost 100 basis points to a three-month high of 5.03% in February, with food and fuel costs continuing to remain volatile.
- Domestic economic activity is starting to recover with the ebbing of the second wave.
- Looking ahead, agricultural production and rural demand are expected to remain resilient.
- Urban demand is likely to mend with a lag as manufacturing and non-contact intensive services resume on a stronger pace, and the release of pent-up demand acquires a durable character with an accelerated pace of vaccination.
- Although investment demand is still anaemic, improving capacity utilisation and congenial monetary and financial conditions are preparing the ground for a long-awaited revival.