Anchor inflation expectations, avoid sudden rate hikes, give credible data, restore MPC role
Fourth in a series of commentaries on inflation
As the Indian economy struggles to recover from the pandemic, it is facing another obstacle in the form of high and rising inflation. Keeping inflation low and stable is the legal mandate of the Reserve Bank of India under the inflation targeting (IT) framework. It is therefore worth asking: Why is inflation so high, and what should be done differently to ensure it comes down and stays down?
Consider the first question. In recent months, the Russia-Ukraine war and China’s lockdowns have pushed up the prices of critical items including crude oil, edible oils and fertilisers. On top of that, for the first time in four decades, India is now “importing” high inflation from developed economies such as the US and Europe. Without doubt these external developments have exacerbated India’s inflation. But they are not the cause of the problem.
As the Indian economy struggles to recover from the pandemic, it is facing another obstacle in the form of high and rising inflation. Keeping inflation low and stable is the legal mandate of the Reserve Bank of India under the inflation targeting (IT) framework. It is therefore worth asking: Why is inflation so high, and what should be done differently to ensure it comes down and stays down?
Consider the first question. In recent months, the Russia-Ukraine war and China’s lockdowns have pushed up the prices of critical items including crude oil, edible oils and fertilisers. On top of that, for the first time in four decades, India is now “importing” high inflation from developed economies such as the US and Europe. Without doubt these external developments have exacerbated India’s inflation. But they are not the cause of the problem.