RBI : Burnished Inflation Credentials

 

 

 

Kudos to Reserve Bank of India (RBI. Once again acknowledging the rampant consumer near double digit inflation for last four years, RBI has decisively chose to increase the policy rate by 25 bps in-order to break the back of ever rising pricing spiral. There is hardly any respite for consumers during last so many years as Government was continue to provide lip service to this vicious phenomenon. Alas, the outcome is even more disastrous on several economic fronts. 

 

Though most of the inflation is driven by supply side issues like, inadequate production of various agriculture commodities, hardly any focus on productivity and continuous increase in Minimum Support Price (MSP). All these have created self sustaining loop of increase in prices. This has enforced the psychology of the citizens that price will be keep on increasing. On the other hand we are unable to bargain higher wages with the employers as due to the slow down in the economy, employers were unwilling to cave in. 

 

Higher inflation has also set the stage for INR to depreciate against major foreign currencies. The catalyst came in May 2013, when Ben Bernanke has hinted possible tapering of purchase of securities. Consequently, foreign investors chose to walk out from the Indian Fixed Income markets, which in turn taken a huge toll on INR. The USD/INR is currently trading at 62.28 while average for CY 13 is 57.22. The point which one should understand is that high inflation differential between India and its trading partners as well as consistent high Current Account Deficit (CAD)  are the  major factors to allow INR to go down once pressure increased due to higher demand for foreign currencies.

 

Now the question is that whether RBI moves can really control inflation. Well, these efforts should be complimented by Central and State Governments. Policy makers should immediately take measures like:

 

1. Create environment for improvement in the productivity, storage & transportation of the agriculture produce.

 

2. Mechanism to control prices of agriculture produce. Right now, big producers and  traders are emboldened with consistent price rise they have witnessed for last so many years. Thus an element of hoarding is always there as reflected in the price pattern of Onion a la squeeze in financial markets. It goes up suddenly  & sharply and then come down and settle at high rate then previous one. There are savvy traders who corner the commodity and then control the price and quantity of the produce. Government should note of this activity and curb it.  

 

3. Price rise in certain commodities has spill over impact on the other commodities as well. Traders now without hesitation increasing the prices of other products as well under one or other pretext.  

 

If government walk the walk with RBI, then consumer inflation will be controlled and India can embark on the journey of sustainable globally competitive nation.