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RBI's desperate catch-up act on inflation may hurt the economy

It isn’t an exaggeration to say the RBI let loose the inflation genie for too long, in search of a stimulus-led growth. It is now playing catch-up with steep, consecutive rate hikes

July 14, 2022 / 06:40 AM IST
Representative image (File image: AP Photo)

Representative image (File image: AP Photo)

India's retail inflation stayed largely unchanged at a high of 7.01 percent in June as against 7.04 percent in May, according to data shared by the government. The June CPI inflation print takes average inflation for April-June quarter to 7.3 percent. With inflation having already averaged to 6.3 percent in January-March, the RBI is now only one quarter away from failure. Former Governor D Subbarao said in an article written for Moneycontrol in May RBI may have to explain inflation target failure to government by September.

That is increasingly looking like a strong probability.

The central bank's primary mandate is to maintain stability. Yet, it let loose the inflation genie for too long, in search of a stimulus-led growth. It is now playing catch-up with steep, consecutive rate hikes. But raising rates too quickly will not bode well for Asia's third largest economy where recovery from pandemic is still fragile.

The MPC, which sets rates in India, obsessed with so-called accommodative stance for a considerably long time saying pandemic -induced slowdown needs closer policy attention, even at the risk of ignoring the near-term inflationary pressure. The panel probably thought high inflation will cool down on its own in due course. But this assumption was proved terribly wrong.