RBI on inflation in 2022
The simple definition of inflation is too much money chasing too few goods . Lots of money chasing few goods. therefore making goods more expensive. Now if you compare the indian scenario, today automobiles have gone expensive, ,components have gone expensive, chemicals expensive ,capital goods expensive ,metals expensive.
Inflation is rising in india where is this too much money coming infrom and who has this too much money ?? Lets try to understand the scenario and the appropriate reasons.
where is this too much money ?? This too much money truly is there in india ,abroad and the impact of that too much money is hitting the indian shore in a big way. We call it imported inflation for a moment .
So where is this money ? governments like the USA in particular have pumped in huge money in their system. Official stimulus joe biden’ administration has recently approved a fiscal stimulus which is pumping money to the tune of 1.9 trillion dollars in the american economy. That money is not being put to good use in USA. It is circulating in global markets, it is sloshing itself in markets like india.
Due to that surplus money worldwide in global markets, commodity prices have gone up. So when we see chemical prices, metal prices, commodity prices go up , it is that surplus money worldwide which is chasing those items . Due to such surplus, manufactured goods in india have also become expensive . so the first reason of too much money is primarily money from abroad.
Now, let’s talk about the indian money . Going by the theory ,there should be too much money in india also but the indian money is not really sloshing around the systems in such a big way. While the government has pumped in some money in the system because of its fiscal stimulus .
That money which came to the consumer in some way or the other from the government’s pumping money the consumer did not spend it in india . The indian consumer today is a nervous so he is not willing to spend. The indian customer is not confident of his economic and financial future. so what is he doing ? He has been saving that money and putting it in banks by the way ofdeposits .
Now, One canthink that the banks are going to lend money and that will comeback in the system but even that has not been happening. Banks are not lending,so all these surplus deposits that they are getting, banks are going and depositing with the reserve bank of india .This is resulting in that vicious circle while the government is trying to pump in money and this money is ifinally landing in the hands of the RBI.
RBI today is sitting with surplus money from banks to the tune of Rs 7 lakh crores and indian money is not really circulating in a big way .we are being victims of imported inflation .
Too much of money in global markets which has pushed up the price of commodities. This has pushed up the price of services and because of that we also have had an upsurge in inflation .
Currently,government gives rbi money, rbi puts the money into the system ,the consumers takes that money, puts It back into the bank and the bank puts it back into rbi. This is the vicious circle that we are in now. So,the aim that the government started to achieve never got achieved.
increasing supply of goods by creating demand ,will inflation come down?
if you really want to combat INFLATION, one of the things that you should do is increasing the supply of goods but we are facing a situation where the demand is not really going up as consumer is nervous. This is if we only talk about supply because of the lockdown. Due to thepandemic there have been shortages in supply bottlenecks ,there have been disruptions in supply .
So, the goods remain to a lesser supply at the moment and that explains why the money chasing the goods looks to be too much in reality . the money is not so much the supply is lesser.
regulation has been mandated on the reserve bank as far as monetary policy is concerned. the reserve bank has got a monetary policy committee it came into effect from 2016 and the mpc sets the interest rates. It regulates the money supply in the country in order to be able to impact supply of money too much money chasing too few goods.
so, the reserve bank either releases money or withdraws money it does that part of the job but when it comes to supply of goods the other part of inflation that is the government’s domain .
supply of goods goes up only if there is growth in the economy . manufacturing is looking up people are doing good and are failing to demand of goods. so one part of it money ,the supply of goods is primarily the government’s domain .
reserve bank is supposed to maintain the inflation at the rate of 4 percent plus minus two percent .This means it could be either six percent or two percent but it has to regulate a flexible inflation.
Targeting policy as part of that the government has directed the reserve bank to maintain inflation at a band rate of four percent plus minus two percent .so the rbi through its monetary policy committee tries to calibrate all the money supply and interest rates such that it is able to achieve that objective.
Further the mandate says that if the reserve bank is not able to regulate inflation or contain it within this band of two to six percent for three consecutive quarters then it is required rather to explain to the government of india why it has failed to do so. In such a case the government probably would want to take over the role of the reserve bank and try to regulate inflation on its own .
let me point out last year for three consecutive quarters right up to december 2020 inflation remained above six percent. The reserve bank was not able to meet the target .
what is the priority of reserve bank ?
It is monetary policy ,priority of reserve bank or regulating the banks auditing, are they policymakers or are they regulators ? what exactly is their priority ?
Their role is of a banking regulator but they also control the monetary policy of the country.
It is important that they do that because monetary policy setting is not the job of some politiician or bureaucreate. It requires some economic expertise to do that . so the reserve bank of india has been given that mandate .
RBI Monetary policy for inflation
there was no monetary policy committee till 2016. at that time ,if the finance minister wanted the interest rate to go up or go down ,he or she used to virtually plead the rbi governor to do that . you will remember when mr chidambaram was the finance minister, the rbi governor would refuse to tow the line and that is why the government the then enters and the babu sitting in delhi decided to dilute this power of the rbi . They formulated monetary policy committee, three nominees of the government, three nominees of the rbi and they will decide what it is .
So, the reserve bank has a dual role dual role as a regulator that is regulating the banking finance sector and the other is monetary policy . Money policy expets them to determine what is a proven supply of money in the economy and at what interest rate should money be transacted .
At some level the rbi are going to rbi is going to get more and more strict with the banks so that there are no npas and at some level rbi would want consumers to go and spend money and therefore banks to give the consumers and smes and and other money to so that they can spend . so how are they going to manage both the rules.
that’s just what is happening at the moment . at the moment the reserve bank is very keen that the consumer spend and so we have what is called a bit of a lose monetary policy money being pumped into the system . but the consumer is not willing to borrow and spend and the banker is also not willing to really lend because they’ve got a mountain of NPAs to handle .
so reserve bank does get into us this situation where what it is trying to achieve through the monetary policy ,the banking regulatory policy is not able to do that .
Steps to bring inflation down in 2022
inflation going down has got a short-term perspective and a long-term . the short-term one, why inflation is a matter of discussion today has primarily got to do with fuel prices . they are at historical highs, so if you want to tackle that one it is the government which will need to cut down the massive taxes that IT levies on fuel prices .
we all know that when you pay 100 rupees a LITRE for petrol or diesel ,the actual cost of the fuel is only Rs 35, the rest of it is government taxes both by the center and the state . So, if fuel price inflation wants to be brought down in the immediate run the government will need to REDUCE the taxes that it levies. Government is not willing to do that because the government treasury is empty and they are trying to raise taxes.
in the long run inflation gets control first by ensuring that the country grows at a rapid pace because rapid growth means supply and demands both start getting balance. the jobs in the economy go up, demand goes up, and manufacturing goes up ,so in that case supply goes up . So,the first impact is growth that gives you a long term benefit on inflation and india has been suffering there.
the second is imported inflation
to control imported inflation you need a strong rupee because if the rupee is strong the prices of imported goods that we pay for those come down. that is not been happening because india’s economy continues to remain weak in terms of growth .
finally the government needs to ensure that its own expenditures are not wasteful in nature .They are productive in nature, they end up boosting growth in the economy .
So, there’s a long term and a short-term issues . Short-term is the fuel price hike that we are talking about long-term ,growth strengthening the country’s gdp in REAL terms india has been suffering .
government has been unmindful of the fuel price hike because they are raising taxes. Govt need money so they are not bothered about the fact that even the poorest man pays for diesel at Rs100 rupees a litre and s a rich man do that, so the government at the moment is unmindful of short-term inflation .
as far as long-term is concerned ,the government has not really succeeded in controlling it. No government has truly control because we have what is called core inflation.
core inflation is primarily on the count of manufactured goods and that inflation in india has always been stubborn. INFLATION has been elevated and sticky as we call it we are not able to bring it down . till we do not bring inflation down it’s not going to improve and that has to do with policies related to growth of the economy.
Will inflation come down in 2022?
As per reserve bank’s estimates ,they say that in the coming 6 months ,inflation would be in the range of 5.5 percent. whether that’s true inflation that hits citizens at the ground level we would defer. but inflation is not going to come down in the near future or at least for the next two three years . This is because unless we don’t control our core inflation ,we don’t ensure that the growth in the economy shoots up .
we ensure that the supply and the productivity in the economy goes up ,we are not able to go be able to see core inflation in control. until that doesn’t happen you are not going to have control inflation .
on the other hand, suppose for a year,suddenly have poor monsoon in that case even food inflation will show up we have been lucky that in thelast 2/3/4 monsoons have been so bountiful that food inflation has been relatively in control. But a bad monsoon will lead to double impact. inflation is not going to really come down
In the coming years real inflation will be upwards of the target that the government has been setting. another reason why it could go up in the coming months is going to be the oil price hike worldwide. if OPEC continues to follow its policy and prices, There will be rise in core inflation, high food inflation and that means it continues to remain buoyant . so india is not going to be able to bring down the fuel price that we pay for again inflation will remain sticky in that case.