Second-order effects

RBI cannot ignore price pressures

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Some economists have argued in recent weeks that the economic momentum in India is slowing. The "State of the Economy" article in the latest Monthly Bulletin of the Reserve Bank of India (RBI)—though it does not reflect the view of the central bank—argues that it appears the slack observed in the second quarter is now over. Private consumption is again driving domestic demand, though the picture is mixed. RBI economists expect real gross domestic product to grow 6.7 per cent in the second quarter and 7.6 per cent in the third quarter this financial year. The official estimate for the second quarter will be released next week. However, one of the highlights of the article was its analysis of inflation conditions, which is being debated across various forums.

The view that the Monetary Policy Committee (MPC) should ignore food prices while determining the policy rate has again resurfaced, with calls for lowering the policy interest rate, including by senior government functionaries.