RBI's focus on growth and not inflation

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  RBI's focus on growth and not inflation

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• Growth in 2020: Lockdowns in 2020 hit India's GDP growth hard. The bigger question for RBI was what would happen to the prices. In a growing economy, prices go up and this is measured by the inflation rate. 
• Inflation: It is the rate at which the general price level increases between one time period to another. So if the price level — captured by an index such as the Consumer Price Index (a basket of goods) — goes up by 10 per cent in April this year over what it was in April last year, the inflation rate is 10 per cent. If prices fall over the past year, we call it deflation. It is like negative inflation, a rare occurrence. Sometimes the inflation rate itself may slow down. Suppose prices increase by 10 per cent in January (over last January), 5 per cent in February (over last February) and 2 per cent in March (over last March) — that is referred to as disinflation, which signals a decline in the inflation rate.
• Inflation in India from 2020: Prices could fall because in a lockdown, the overall demand for goods and services in the economy would collapse. Add to that the effect of people losing jobs, or facing salary cuts, and thus they will demand less of even the most essential items while cutting down all discretionary expenses (such as buying a fancy new phone or going for a vacation). But prices could have also risen sharply because the lockdown could have completely disrupted the supply chains. Everything from onion to your favourite breakfast cereal to cars to computers could either not be produced or not transported to you because of the lockdown. A sudden crunch in supply could spike prices, especially of food and other essential commodities, notwithstanding the fall in demand.  

1. Whether we had deflation (due to the collapse of demand) or a sharp spiralling of inflation (due to a supply crunch) was not just of academic interest. All of this mattered because India’s central bank, the Reserve Bank of India, is mandated by law to target the inflation rate.
2. Keeping the rate at which the general price level facing the consumers increases from one year to another is RBI’s main policy goal. And it is noteworthy that governments don’t always help out the RBI in this regard. 

• The petrol question: Throughout the past 12 months, the central and state governments have been piling on taxes on petroleum products, thus leading to higher retail prices of petrol and diesel. This pushed inflationary expectations in the economy strongly. India saw prices going out of its central bank's comfort zone. 
• Policy significance: India’s growth was decelerating before the onset of the Covid pandemic and as such, right through 2019, the RBI was in the mode to cut interest rates and incentivise economic activity. It did not have to worry much about retail inflation at the time. Right through the past financial year — April 2020 to March 2021 — the RBI kept signalling that it would support growth and in doing so allowed the inflation rate to stay out of its mandated range. The RBI accorded primacy to boosting GDP growth instead of meeting its legal requirement of maintaining inflation within the mandated range.
• Second wave: By the time the RBI’s Monetary Policy Committee met earlier this month — April 5 to 7 — to decide on its policy stance, India was already in the grip of the second Covid wave. The daily new caseload had already crossed the previous high and was well past the 1-lakh mark. So the RBI was back to square one. Not only did retail inflation continue to be high in March but even the wholesale inflation spiked to over 7 per cent. The RBI stuck to last year’s playbook. It declared — once again — that it will continue to support growth for as long as required.     

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