NEW DELHI: Inflation at 11.05 per cent for the week ending June 7 on the wholesale price index is a shock in double digits. A higher than two percentage points rise in the inflation rate will push the government further to the wall than it already is on how to handle the raging fire in the economy.
The stock market reacted sharply, falling by over 500 points to end a dismal week of performance. The current inflation is clearly caused by the global spike in oil prices. Indicators point to the fact that fuel prices led much of this rise. If anything, the food index has gone down by 1 per cent and the non-food index is only marginally higher.
We know that the current inflation is essentially imported. But we have to tackle it the best we can at home. There is a need for stringent demand side and monetary measures. It is time for the Reserve Bank to use all possible tools it has at its disposal to douse the fire. As an immediate step, it may be a good idea for the central bank to let the rupee appreciate a bit.
That would ease import prices of crude as well as some other commodities. An appreciation of the rupee could help in containing inflation also by mopping up some excess liquidity in the system, though it is not a solution without attendant risks.
An appreciated rupee can help bring down landed prices of imported items, thus boosting supply at lower prices. But a more expensive rupee will affect exports. Besides, selling dollars to help the rupee rise is a suggestion that the RBI might argue would lead to other negative effects. Nevertheless, we will have to live with the side effects because controlling inflation must be the central bank’s top priority now.
Along with this, other tools should also be used. Interest rates are effectively negative today, given the rate of inflation.
Tightening money supply is now necessary despite the restraints it might cause in the economy’s growth. Inflation at current levels hurts people, creates economic instability and even political disruption, and is therefore a bigger threat than a slowdown in the pace of growth.
Runaway inflation is an unannounced and painful taxation on people. This time around, it may not be the government’s fault. Indeed, most of it is imported and is hurting economies around the world. But our monetary managers must take urgent domestic action to minimise inflation’s nasty aftereffects . Which means that the RBI will soon have to take some hard decisions.
The stock market reacted sharply, falling by over 500 points to end a dismal week of performance. The current inflation is clearly caused by the global spike in oil prices. Indicators point to the fact that fuel prices led much of this rise. If anything, the food index has gone down by 1 per cent and the non-food index is only marginally higher.
We know that the current inflation is essentially imported. But we have to tackle it the best we can at home. There is a need for stringent demand side and monetary measures. It is time for the Reserve Bank to use all possible tools it has at its disposal to douse the fire. As an immediate step, it may be a good idea for the central bank to let the rupee appreciate a bit.
That would ease import prices of crude as well as some other commodities. An appreciation of the rupee could help in containing inflation also by mopping up some excess liquidity in the system, though it is not a solution without attendant risks.
An appreciated rupee can help bring down landed prices of imported items, thus boosting supply at lower prices. But a more expensive rupee will affect exports. Besides, selling dollars to help the rupee rise is a suggestion that the RBI might argue would lead to other negative effects. Nevertheless, we will have to live with the side effects because controlling inflation must be the central bank’s top priority now.
Along with this, other tools should also be used. Interest rates are effectively negative today, given the rate of inflation.
Tightening money supply is now necessary despite the restraints it might cause in the economy’s growth. Inflation at current levels hurts people, creates economic instability and even political disruption, and is therefore a bigger threat than a slowdown in the pace of growth.
Runaway inflation is an unannounced and painful taxation on people. This time around, it may not be the government’s fault. Indeed, most of it is imported and is hurting economies around the world. But our monetary managers must take urgent domestic action to minimise inflation’s nasty aftereffects . Which means that the RBI will soon have to take some hard decisions.
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