RBI worried on inflation risks, wants GoI's fiscal measures

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  RBI worried on inflation risks, wants GoI's fiscal measures

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Read more on - Polity | Economy | Schemes | S&T | Environment

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1. The story: Inflation is finally catching up with the bosses at the RBI. It has now said that runaway price rise has reduced the space available for monetary policy to revive slumping economic growth. It now wants fiscal measures, the domain of governments, to crush supply-side inflation.
2. Inflationary expectations: Inflation is a key concern now, and constraining the monetary policy from using the space available to act in support of growth. RBI said that monetary policy will monitor closely all threats to price stability, to ensure general financial stability, while continuing with the accommodative stance. Supply-side inflation refers to price rise caused by shortages of goods.
3. Why the concern: The RBI warning comes after cuts in India’s FY22 growth forecast by many experts, due to a vast secod Covid wave. In April 2021, the RBI had estimated retail inflation at 5% in the fourth quarter of fiscal 2021; 5.2% in the first three months of FY22; 5.2% in the second quarter; 4.4% in the following three months; and 5.1% in the fourth quarter, with risks broadly balanced. It had also projected economic growth at 10.5% in FY22.
4. Kotak wants notes: Recently, the Confederation of Indian Industry (CII) chairman and Kotak Mahindra Bank chief executive Uday Kotak had said that it was time RBI expanded its balance sheet in support of the economy. It is true that the MPC has no option but to stay accommodative even as it monitors incipient price pressures and keeps all rates on hold. Since 5 May, when RBI announced liquidity measures, India’s growth outlook has further degraded as inflation may remain persistent even in the second half of 2021.
5. FIT: The government has retained RBI’s flexible inflation target in the 2-6% band for the five years through 31 March 2026. While inflation measured by the Wholesale Price Index softened in 2020-21, there was no pass-through to retail inflation. According to RBI, the substantial wedge between wholesale and retail inflation during the year pointed to the persistence of supply-side bottlenecks and higher retail margins, underscoring the importance of supply management. Meanwhile, RBI managed to repatriate nearly Rs.1 trillion to the government after higher income from the sale of foreign exchange transactions and lower provision.
6. New financial year: Starting fiscal 2021, RBI changed its accounting year from July-June to April-March. In the nine months ended 31 March, RBI saw a 69% increase in earnings from foreign exchange transactions to Rs.50,629.18 crore from Rs.29,993.22 crore a year ago. The accounting change adopted in 2019, as per the recommendations of the Bimal Jalan Committee report, allows RBI to pass part of the profit made from selling foreign exchange to the government as a surplus. From July 2020 to March 2021, RBI sold a total of $85.2 billion of its foreign exchange. Interestingly, much of the dollars were sold in the last two months of the accounting year, soon after the Budget.

Read more on - Polity | Economy | Schemes | S&T | Environment

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