Centre and Reserve Bank must strive to consolidate inflation control measures

Inflation represents the prices of various commodities and services and inflationary pressures are built up when there is an imbalance in demand and supply or the demand for goods and services are higher than the relative supply of such goods and services. It can also happen when there is too much liquidity in terms of money supply chasing few goods.

It is not possible for each country to be self-dependent in respect of all goods. Today due to technology and innovation, some countries are specialised in supply of critical items like solar energy and semiconductor chips, among others.

There has been massive industrialization and manufacturing either in respect of finished goods, essential raw materials or specialised machineries like China. Their monopolistic position and the manner they fix prices will have an impact on inflation in countries that are dependent on such imports. This can also noticed in countries supplying

oil and natural gas. The export-import ratio and the quantum of forex reserves will factors in deciding the impact on inflation.

India's forex reserves are today at a very comfortable position. However, the value of rupee is on a decline or depreciated against dollar which affects the cost of products that are imported.

Inflation management is a complex issue due to the dynamic nature of domestic and global uncertainties. This implies that both the regulator and the government have to constantly monitor the rate of inflation-including wholesale, core and consumer price inflation. They should endeavour to keep the rate of inflation in a range that can reduce the hardships of the common people.

As a result of Covid, inflation pressures built up substantially all over the world and led to a substantial increase in reference rate both in India and abroad.

Having experienced the topsy-turvy cycle of a much higher inflation, no regulator will take the issue of inflation lightly unless they get enough confidence about the disinflationary process and futuristic inflation in the desired level. There is always a fear that the underlying inflationary pressures can return if reduction in reference rates are not timed properly and such inflation again cropping up will have a bigger impact on further inflation control as well as on the economic growth.

Both the government and its regulator will have complementary and collective roles in controlling inflation. It calls for a fine balance between inflation and growth dynamics. Excessive inflation will affect the growth drivers and in the short term higher interest rates resorted for controlling inflation may have negative outcome on growth, even though in the long run with proper and adequate control on inflation will result in sustainable and consistent growth. The regulator will have to rein in the excessive speculative demand and inflationary cycle and the government should control the shortages by adequate supply hereby curbing speculative hoarding by taking penal measures.

An incomprehensive price rise may be due to domestic or global factors, which can controlled by either restricting exports temporarily or by facilitating imports. This will ensure better supply and reduce prices, sooner than later. There has been a perfect understanding and equal roles played by the regulator and the Union Government in the recent fight against inflation, which has now come under control. This may well be at the last leg of disinflationary control and as such the Reserve Bank of India (RBI) in its recent policy meeting has continued on pause as to the repo rate, This is in spite of change in the stance from withdrawal of accommodation to neutral.

What must have been worrying the RBI is the fact that the Governor clearly mentioned that there are repeated risks and this was not an appropriate time for considering repo rate reduction, particularly taking into account adverse weather events, accentuating geo political conflicts and the recent increase in commodities prices due to tensions in the Middle East.

It is therefore not much related to temporary reduction in inflation and reducing repo rate as significant risks still persist. Durable and sustainable control on inflation is yet to be achieved. As expected, subsequent headline inflation at 5.49 per cent went substantially higher than market expectations and the last inflation is much near to the upper level of tolerance band of six per cent.

Weather upheavals have been happening frequently in India and elsewhere. This is a major climate change risk and this will affect the supply of daily essentials like food items and also on government finance as the cost of recovery and damage control will be extremely high.

The prevailing climate risks prevent the regulator in controlling inflation, which is also a major factor in delaying repo rate reduction. Climate change will be a major challenge and threat for central banks in their mandate of inflation control as the impact of climate change on supply of food items, energy shortage, decline in productive capacity, loss of wealth due to natural disasters and physical and transition risks will have impact on the financial condition of the government and financial institutions would be enormous.

RBI Governor Shaktikanta Das recently reiterated the significant risks to inflation control and stated that rate cut at the current time is ‘risky, premature and India's growth remains steady with inflation moderating and future rate action depends upon incoming data and overall inflation outlook’. These give a clear indication that unless there is substantial improvement in the disinflation process and till the RBI gets the desired target of inflation on a durable and sustainable basis, they may not reduce the repo rate.

Hence any expectation of repo rate cut in December will be premature and even in March it will be dependent on the then prevailing food, vegetables and oil prices .

We must compliment the RBI and the Centre for their effective roles in these periods of inflation control and trust that similar complementary role well played into the future.

(The author is former Chairman & Managing Director of Indian

Overseas Bank)