Why in news?
The RBI panel has forecasted the retail inflation to 5.7% in the financial year 2021-22.
What is India’s current inflation trend?
Inflation is the rate of increase in prices over a given period of time
CPI inflation remained elevated around 5.6% in July 2021.
The WPI inflation at double digit level has been alarming since April 2021.
The current forecast of 5.7% is close to RBI’s upper tolerance limit in the 2-6% band.
What policy measures had led to inflation?
These accommodative policy of RBI during COVID time had led to the built-up of inflationary pressures
The Monetary Policy Committee (MPC) has cut the repo rate by 115 basis points (since March 2020).
RBI has been buying both domestic and foreign assets that correspond to quantitative easing.
RBI has refinanced to all-India financial institutions and granted additional SLR exemption to accommodate banks under Marginal Standing Facility.
RBI has announced asset purchases (2.2 trillion) under the Government Securities Acquisition Programmes
What are the major effects of inflation?
Creditors and debtors - The effect of inflation on debtors is positive because they can pay their debts with money that is less valuable. With the conditions reversed it negatively affects creditors
Producers and workers - Producers gain because they get higher prices and more profits from the sale while workers lose as their money wages do not usually raise proportionately with the increase in prices.
Fixed income-earners - Salaried people, landlords, pensioners, etc., suffer because inflation reduces the value of their earnings
Investors and bondholders - The investors in equity shares gain as they get dividends at higher rates. But the bondholders lose as they get a fixed interest with reduced value.
Effects on Production - Inflation stimulates the production of goods as producers get more profit.
Effect on growth - A mild inflation promotes economic growth, but high inflation hampers the economic growth as it raises cost of development projects.
Inflation affects the poor more than the rich widening the income inequality
What should be done?
RBI has to normalise its monetary policy in a non-disruptive manner by draining at least 75% of the excess liquidity
14-day variable rate reverse repo auction conducted by RBI to absorb surplus liquidity has to be continued
The RBI has to sell dollar opportunistically to reduce excess liquidity
Source: The Hindu, BussinessLine
Quick Facts
Monetary Policy Committee
RBI’s MPC determines the policy interest rate required to achieve the inflation target (with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent)
The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth
It is composed of 6 members - three members from RBI (including RBI governor) and three members nominated by central government
The decisions by the MPC are decided by a majority of votes by the members present and voting.
In the event of an equality of votes, the Governor has a second or casting vote.
Currently, the MPC meets six times in a financial year, i.e., every two months.
