Current inflation in India is not due to surge in demand exceeding supplies. On the contrary, consumption demand is subdued and the production capacity is underutilized. In such circumstances,recent hikes in repo rate from 4.0% to 4.9%, almost by 25%, might be counter-productive. It shall increase lending rate hiking EMI of Housing and Auto loan. Therefore, slowdown in these two sectors is inevitable. More so, such steep hike in borrowing cost might impact investment rate and GDP growth. India must use such tools which arrest inflation without hurting public income (GDP).
A hike was inevitable, but we are now entering the red zone. Any future hikes in repo rate will reflect markedly on housing sales.” quote on RBI Monetary Policy Reaction.
Related: RBI Monetary Policy Reaction – Entering the Red Zone
Current inflation is due to “cost push” effect, mainly due to high cost of primary energy such as coal, diesel and gas. In sequel cost of secondary energy (electricity) is also rising along with core sector goods like steel, metal, cement and fertilizer etc. High taxation on the mineral and energy is another key reason for current inflation. Its impact travels to entire economy in a compounding manner.
Therefore, it is imperative to increase production of coal and power and restore the price of thermal coal to a level of 2019-20. The taxes on imported energy and mineral taxes may also be prune down to an affordable level. Ways and means may be designed to reduce logistics cost also which impacts all goods. As regards food inflation, tailor made strategies may be designed for the key food items.
In medium/long term, India must reduce import dependency for the energy, food, fertilizers and such essential commodities to the possible extent. Monetary tools should be used as a last option only in the case of consistent surge in demand.
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