Opinion by Editorial
The RBI’s monetary policy committee may be able to cut rates by February, if not earlier. The government, on its part, would do well to adhere to the rules of fiscal prudence
Food inflation, in all likelihood, should ease by December-January with the market arrivals of the kharif/late-kharif crops and also winter vegetables — from tomatoes and carrots to cauliflower, radish, beans and spinach.
Nov 23, 2024 04:20 IST First published on: Nov 23, 2024 at 04:20 IST
The Narendra Modi government and the Reserve Bank of India (RBI) seem to be at odds over the need for cutting interest rates amid concerns on slowing growth and stubborn inflation. Finance Minister Nirmala Sitharaman has said that if Indian industry is to expand and build new capacities, “our bank interest rates will have to be far more affordable”. Commerce Minister Piyush Goyal has been more direct. The central bank, according to him, shouldn’t factor in food inflation while taking a decision on lowering its policy interest rates, which have been unchanged since February 2023. Doing so, he believes, is based on “flawed theory”, while clarifying that it was “my personal view and not that of the government”. The RBI, on the other hand, has termed the 6.2 per cent year-on-year consumer price index inflation number for October — above its 6 per cent upper tolerance limit — a “sticker shock”. The current inflation, if allowed to run unchecked, “can undermine the prospects of the real economy”.
Neither side is wrong. The RBI’s latest ‘State of the Economy report ‘ has noted that it isn’t retail food inflation alone that’s rising — from 5.4 per cent in July and 5.7 per cent in August to 9.2 per cent in September and 10.9 per cent in October. Even “core” inflation, which excludes price increases in food and fuel, has edged up from 3.1 per cent to 3.8 per cent between June and October. The central bank is worried, rightly, whether elevated food prices are having second order effects by transmitting to wages and spilling over into generalised inflation. Such inflation, in turn, can hurt growth itself by biting into household consumption demand and corporate earnings, impacting their inducement to invest. Bringing down inflation closer to the RBI’s 4 per cent target, and anchoring the public’s inflation expectations, is hence desirable even from a growth perspective. But the government’s argument that high interest rates can do little to rein in food prices — more so, the 42.2 per cent vegetable inflation for October — cannot be dismissed either.
Food inflation, in all likelihood, should ease by December-January with the market arrivals of the kharif/late-kharif crops and also winter vegetables — from tomatoes and carrots to cauliflower, radish, beans and spinach. That should enable the RBI’s monetary policy committee to cut rates by February, if not earlier. The government, on its part, would do well to adhere to the rules of fiscal prudence. The ruling BJP and the Opposition have been equally guilty of tilting the political discourse towards higher spending on populist welfare schemes, the former markedly after the Lok Sabha election reverses. In today’s uncertain global geo-political environment and fragile investor confidence, the last thing the country needs is a fiscal gravy train wreck.
© The Indian Express Pvt Ltd
