“Inflation is now the biggest challenge”


However, rate hikes to curb rising prices could hamper the incipient recovery in demand: official

However, rate hikes to curb rising prices could hamper the incipient recovery in demand: official

Inflation is now the main challenge for India’s policymakers, rather than the Fed’s taper program, and measures such as raising interest rates to curb rising prices could hurt the fledgling consumer demand recovery from the pandemic not just in India but globally, a senior official said Wednesday.

The NSO is expected to release April retail inflation data on Thursday. Inflation, as measured by the CPI, rose to 6.95% in March, the third straight month it has stayed above the RBI’s upper tolerance level of 6%, and most economists expect the pace of price increases to slow in April will accelerate.

“The biggest fear right now is inflation and we have started to address it,” the official involved in monitoring the economy said on condition of anonymity. In an off-cycle move, the RBI hiked interest rates by 40 basis points last week while maintaining its accommodative monetary policy stance, citing rising price pressures.

“Inflationary pressures of nearly 7% for March came four days after the RBI review, then came Indonesia’s decision to ban cooking oil exports and the escalation of sunflower oil and coal supply restrictions. Inflation used to be high in manufactured goods, weak in contact-intensive services, but now it’s food and crude oil inflation and is spreading to goods and services as producers are no longer able to stem the transmission of input costs the official.

“All central banks will do their best to bring down inflation, but in doing so they risk cutting low post-pandemic demand,” the official said.

“Currently, the inflationary forces hitting us and the rest of the world are not in everyone’s hands and three-quarters of the positions in our consumer price index are at risk due to the war in Ukraine, leaving the scope for overdoing,” the said Officer.

“stagflation scenario”

Globally, stagflation has moved from a risk scenario to a baseline scenario, the official added.

While the RBI governor had urged the Center and states to cut taxes on gasoline and diesel to ease inflationary pressures, the official noted that the rise in global fertilizer prices would push subsidies sharply higher.

“It’s a difficult compromise. If the excise duty on petroleum products is cut by, say, £5 a liter and more borrowing is taken out to fund the fertilizer subsidy bill, this will push up the budget deficit and yields on government debt even further,” the official stressed.

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