Here’s Why The Salaried Class Might Not Get Real Relief From Inflation And RBI Policy

The Reserve Bank of India‘s (RBI) Monetary Policy Committee (MPC) unilaterally decided on April 8 to retain the policy interest rate at 4% as well as the policy position accommodating, with an emphasis on reduction of support. In basic English, “accommodative with an emphasis on reduction of comfort” simply implies that the central bank recognised there was too much money flowing about the economy and therefore it needed to gradually restrict it.

The RBI, however, opted to raise the policy interest rate by 40 percentage points with an obvious impact on 4 May (depending on an off-cycle session of the MPC on 2 and 4 May). The increase in the Cash Reserve Ratio (CRR) to 4.5 per cent marked the beginning of the financial tightening route. The CRR is the percentage of total assets that a financial institution must keep with the RBI as ready funds. There is no interest paid on the CRR. The RBI was draining out roughly Rs 87,000 crores of cash from the economy to help the CRR by basis points ( bps).

RBI’S Turnaround

So, what caused the RBI to call an off-cycle conference or less a month after the last one and declare these adjustments? Inflationary pressures have been evident for weeks, and the threat to the world economy posed by the Russia-Ukraine conflict was evident at the preceding MPC meeting.

Several credible explanations are floating around.

It is just that the Reserve bank came to the realization the US Fed was planning to increase its inflation target, which could have a variety of impacts unless the RBI raised rates first to mitigate a few of these.

The second would be that the RBI came to the realization there’d be no epiphany and that pricing would not come crashing down on its own — that it has already put off adopting any substantial measures to temper prices for far too long and can no longer simply wait.

The third explanation would be that the RBI hoped the government is going to take steps to address supply-side issues, which would help to reduce rising inflation. However, it became clear that this was unlikely to ever happen. Any or all of these hypotheses could be valid.

India Experiencing Supply Inflation

Annual inflation, especially food money supply, as well as jobs and earnings, are the most pressing concerns for the poor. The rate increase and CRR increase recently announced are unlikely to influence inflation. This is due to two factors. One is that India is experiencing supply-side inflation rather than demand-side inflation. In truth, consumption has been weak – the most recent set of GDP estimates shows that personal expenditure has barely surpassed the level seen in March-end 2020.