Inflation in India: Will monetary tightening help solve India’s inflation problem? Swaminathan Aiyar explained

The RBI increased the policy repo rate by 50 basis points, bringing the cumulative increase to a whopping 90 basis points in two straight months. Soaring inflation, fueled mainly by global factors, has prompted central banks around the world to start tightening the money supply.

The imported nature of the current surge in inflation, coupled with the fact that RBI Governor Shakkanta Das himself concedes that 75% of the surge in the latest inflation forecast is food-related, deserves the question – will the rate hike apply the brakes? rising inflation as it is mainly driven by food and fuel?

“In India in particular, everyone knows that raising interest rates cools inflation by slowing the economy and saying demand is falling, but when the particular inflationary shock was caused by things like food and fuel, they aren’t very sensitive to that interest rates. Economic growth may be a little more sensitive than food and fuel.”

Aiyar said the aim of the rate hike is to slow the economy and it would be naïve to think growth will not be hurt.

“Overseas in America and Europe there is a chance that will happen and it may be a mild recession but everyone is aiming to slow down the economy and India will also see the economy slow down. The goal isn’t to say that growth won’t be affected at all. Please let’s not be naive or stupid.”

Aiyar called the rate hikes just one step on a long journey, saying that India is just following what other central banks are doing and not something that is unique to us and will help solve our problems.

“We don’t do anything alone, we don’t do anything that we believe will solve the problem unlike anyone else. We say everyone else take a step, a step, another step. You are making a move and we too have to keep up with the rest of the world because if we are seen as not keeping up people will say that this guy doesn’t understand what is happening and money can flow out of India in a big way.

He said measures like the government’s recent tax cuts would have a more immediate impact on cooling food and fuel prices.

“There are various arrows in the government’s quiver to solve inflation, such as changes in tariff structure or changes in import-export policy,” Aiyar said.

He added that raising interest rates by the RBI will not help solve the food and fuel problem.

“RBI’s rate hike is an attempt by a much larger economy at large to try to cool demand. These two (rate hike and tariff cut) should not be confused, and the Reserve Bank will not solve the food and fuel problem.”

The RBI Monetary Policy Committee on Wednesday raised interest rates by 50 basis points to 4.9 percent and raised its inflation forecast for the current fiscal year to 6.7 percent from the previous 5.7 percent. The central bank, on the other hand, is leaving its GDP growth forecast for the current fiscal year at 7.2 percent.

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