Prices have jumped in the past few months in a way a generation has not seen, prompting central bankers around the world to tighten monetary policy. Of course, India is one of the few countries that have seen worse price pressures; So Mint Road is quiet.
Crude oil, aluminium, steel, copper, fertilisers, natural gas – prices of all commodities have risen and consumer prices have begun to fall.
The first assessment was that the supply disruptions due to Kovid led to the rise in prices. Then it shifted to a lack of chips, then a lack of capacity due to ESG which put a lid on expansion. Now, it is the Russian invasion of Ukraine.
The special thing is that the central bankers are silent on how much their note printing contributes to the price rise. India targets an inflation of 4%, half of which is latitude on either side. But it saw a price increase of 6.07%, well above the upper tolerance limit of 6%.
It is in this background that the monetary policy committee (MPC) of the central bank is meeting this week.
The MPC, led by Governor Shaktikanta Das and Deputy Governor Michael Patra, has argued that the setting is different for India this time.
“Amid the current divergence in policy actions by central banks across the world, we have continued our accommodative stance based on our domestic growth-inflation dynamics,” Das said last month.
The West had a near-zero rate, so would have to hold on, while India does not need it. Patra listed that reduction in central fuel taxes, record food production, supply-side interventions, low pass throughs and high foreign exchange reserves could help mitigate the global inflationary impact.
India’s CPI, which gives about 40% weightage to food, is probably under control due to record foodgrain production, but there could be second-order effects.
“We expect the impact of supply-side disruptions on the agriculture sector to be offset by higher inflationary pressures, primarily the effects of a second round of higher international food prices and input costs, and increased fiscal pressures in the form of government fertilizers and food products. Reason: “The subsidy bill could see an increase,” said Upasana Chachra, an economist at Morgan Stanley.
In addition to inflation targeting, a full-service central bank also sees financial stability as one of its key deliveries.
Last year, Governor Das expressed his concerns about the level of the stock market and retail participation. It’s just getting faster. Indian equities, at nearly 20 times forward earnings, are among the most expensive among emerging markets. Lower returns from traditional risk-free instruments are also forcing savers to shift to riskier assets in India.
“Record negative real interest rates supported asset prices and some discretionary consumption,” said Anant Narayan, senior India analyst at research firm Observatory Group.
Equity funds saw inflows of Rs 3.8 lakh crore in the last one year, more than four times the outflow of foreign funds. In addition, gold imports stood at $50 billion.
A ‘sustainable’ economic recovery is the priority of the RBI. But the recovery is uneven.
Profits of the top 4,200 companies doubled in the nine months ended December, while GDP remained stagnant.
Observatory Group’s Narayan said, “While overall individual consumption has dwindled, it is a dichotomy between India’s thriving ‘formal sector’ of large companies (employing ~15% of India’s workforce) and struggling small businesses. ”
Ultra-lax monetary policy has helped increase financial assets benefiting the wealthy but not the less privileged. Conversely, holding such a policy stance for too long could damage the less privileged and pervert savings behaviour, leading to volatility, as was the case in 2013, although the setting may be different.
“Inflation occurs when the quantity of money increases significantly faster than output, and the faster the quantity of money per unit of output, the higher the rate of inflation. Perhaps no other proposition in economics No. Established as this,” Friedman wrote.
Mint Road’s latest contemporary papers published The Deficit Myth: A Review of Modern Monetary Theory and How to Build a Better Economy by Stephanie Kelton in a rare act that quashes most traditional economic theories.
Should this be seen as a sure sign of a change from Friedman?
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