World over, doubts are being raised about the effectiveness and even relevance of the inflation targeting mandate of central banks. Central banks have faced criticism for failing to correctly judge and predict the interest rate-inflation dynamics during the post-Covid period.
Take the Indian case. The Reserve Bank of India (RBI) kept the interest rates quite low during 2020-21 and 2021-22. Inflation had conspicuously started raising its head by the middle of 2021-22, but was considered transitory by the central bank and ignored. Then, all of a sudden, in May 2022, the RBI began one of the steepest interest rate-raising cycles in recent history.
The repo rate was increased from 4 per cent to 6.5 per cent by February 2023, and rates have been kept at this level since then.
For quite some time now, the markets have been speculating about when the RBI would start reducing interest rates. Many experts view the current real interest rates to be high, discouraging new investments and hurting growth. The arguments circulating suggest that the increase in repo rate has achieved its purpose, and it is time for the RBI to announce a road map for rate cuts. Some advocate that the real interest rates shouldn't be more than 1-1.5 per cent, and question whether consumer price index (CPI) is the right inflation index to target.
They argue that the RBI should take the lead in reducing rates without waiting for the US Fed to do so. On the contrary, there are others who support keeping the rates high to bring the CPI below 4 per cent. Some have even raised the basic doubt of whether the central bank can actually credibly control inflation.
This column examines the need for tweaking the present inflation-targeting mechanism in India, an ILLUSTRATION: BINAY SINHA Go issue that should be prioritised by the new government formed in June.
This story is from the May 21, 2024 edition of Business Standard.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.
Already a subscriber ? Sign In
This story is from the May 21, 2024 edition of Business Standard.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.
Already a subscriber? Sign In
India Inc profit in Q4 grew least in 5 quarters
Listed companies' combined net profits (adjusted for exceptional gains and losses) were up 11.4 per cent yearon-year (Y-o-Y) in the January-March 2024 (Q4FY24), growing at the slowest pace in the last five quarters.
Rising mercury quenches FMCG thirst
With heatwave persisting in most parts of the country, fastmoving consumer goods (FMCG) companies continue to report a sharp increase in the sales of summer-centric products like ice creams and cold beverages.
Agnikul fires up reusable rocket dream, orbital launch next target
After the successful test flight of Agnibaan SORTED, Chennai-based space startup Agnikul Cosmos is lining up an orbital flight in the next 12 months and is also drawing up an ambitious plan to develop India's first reusable launch vehicle carrying payloads.
Indian travellers in 'hot pursuit' of luxury
More inclined to seek unique experiences, willing to brave the heat, and explore beyond traditional holiday seasons
HAZE OVER BRIGHT LINE TEST
Why transfer pricing over marketing intangibles has become a contested issue between companies and tax authorities
Of cricket and monetary policy
The June policy will be one of status quo in every way. There will be no change in rate or stance
Small credit business gives itself a hand
As unsecured loan growth ebbs, new ways to serve the segment have emerged, report
Banking channel for financial inclusion feels left out
Business correspondent firms' revenues are under stress as banks get tough with them to meet targets
Unclaimed shares in banks caught in legal limbo
The Banking Regulation Act, 1949, empowers the Reserve Bank of India (RBI) to regulate banks, but many of its provisions do not apply to those owned by the government.
Lack of central KYC hinders market participation
I recently spent an idyllic week trekking with friends in the Dordogne region of southwest France.