AS WIDELY expected by economic experts and markets, the Reserve Bank of India (RBI) has signalled a hike in repo rate to tame inflation that rose to a worrying level of 7 per cent in August. In an article, the RBI economists have pitched for front-loading of rate increase to anchor inflationary expectations which opens way for the Monetary Policy Committee (MPC) to hike interest rates by at least 25 bps in its review meeting scheduled on September 30. The hike has become imminent due to rising food prices which has taken inflation beyond the RBI’s safety band. But there is also a silver lining to the cloud in the form of softening of commodity prices especially crude oil which means the third quarter may see a tapered down inflation. The immediate task for the country is to deal with the hike in interest rates which India has so far managed commendably well in face of global volatility.

 

The shooting up of inflation is primarily due to resurgence of food prices, including cereals, in the monsoon season. Though the RBI economists maintain that the inflation momentum would ease in the third quarter and turn mildly negative in the fourth quarter there is still a lurking danger of the retail inflation remaining in the higher zone due to delay in withdrawal of monsoon as predicted by the weather department. India needs to brace up on the food front, as rightly suggested by the panel, but at the same time, the easing of fuel and other commodity items should be used to offset the threat of retail inflation. A big worry that can be addressed only by a hike in increase rate is the supply-side inflation. There is a huge jump in consumer spending with the onset of festival season. It will go further up in the third quarter when India celebrates its biggest festivals. There is also a hint of revenge spending by the consumers who were severely restricted by the coronavirus pandemic. Rising gap in demand and supply would further lead to panic in the markets and the repo rate hike would be negated very quickly. All these factors must form the base of the next monetary policy action to arrest inflation. There is also a danger of the global volatility, including the unending Russia-Ukraine war, casting its impact on critical sectors. The key for India is to find the right balance between outflow and spending. RBI must pass this test.