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All quiet on the interest rate front

Hindustan Times

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August 22, 2023

A spike in the prices of staples has created a dilemma: Should RBI use blunt instruments such as interest rates, or take comfort from softening core inflation? For now, it should be the latter

- Rahul Bajoria, Amruta Ghare

All quiet on the interest rate front

The economy has battled volatile external conditions in the past few years, but the management of both growth and domestic inflation has been broadly on the ball, helping anchor India’s economic backdrop with enhanced macro stability. However, not everything can be controlled, as can be seen in the current retail price spike of tomatoes, a domestic staple. From a national average of ₹32/kg in June, prices rose to ₹140/kg in early August — ranging from ₹40/kg to ₹250/kg during that period. While the spike in prices has played out in the past six to seven weeks, they have now started to correct, albeit slowly, with new crops arriving in mandis and supermarkets.

Still, looking beyond tomatoes, the prices of cereals (especially rice), pulses, vegetables such as onions, spices, and electricity are also rising. Should this trend change the course of policymaking, especially monetary policy, which is mandated to target inflation? The Reserve Bank of India (RBI) has kept interest rates on hold since February, but recent elevated Consumer Price Index (CPI) inflation prints are now driving markets to price in a (remote) possibility of another rate hike. This, despite RBI signalling that it is somewhat willing to look beyond a transitory price shock, in its latest August meeting. Still, for any policymaker, including RBI, the dilemma around the current situation is this: Does it choose to react to a supply-led price shock with blunt instruments, such as interest rates, or take comfort from moderation in underlying core inflation? For now, we believe it should be the latter.

FLERE HISTORIER FRA Hindustan Times

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