Inflation, Leads to Debacle

SATISH SINGH

Due to the situation of rising inflation, in the monetary review presented on February 8, the Reserve Bank of India decided to keep the repo rate unchanged at 6.5 percent for the sixth consecutive time. Before this, on February 8, 2023, the repo rate was increased from 6.25 percent to 6.5 percent, so that inflation could be kept under control. 

Since inflation has remained high for the last 12 months, the repo rate has also been kept unchanged at 6.5 percent during this period. There is also a history of not increasing the repo rate for a long time. During the economic recession of 2008, the repo rate remained at 6.5 percent for 10 months. Even during the debt crisis of 2013, the repo rate remained unchanged at the level of 7.85 percent for 8 months. Then, even during the Corona period in 2020, the repo rate remained unchanged at the level of 4 percent for 25 months.

In 2020, the repo rate was 4.4 percent on March 27, while it was reduced to 4 percent on May 22, so that the pace of growth could be accelerated to come out of the negative situation of the Corona pandemic. In 2022, the repo rate was 4.4 percent on May 3, which was increased to 4.9 percent on June 8. On August 5, it was again increased to 5.4 percent, on September 30, it was again increased to 5.9 percent and on December 7, it was increased once again, taking it to 6.25 percent. Further, on February 8, 2023, it was increased to 6.5 percent. The repo rate was increased continuously during 2022, so that inflation can be kept under control.

The Reserve Bank has kept the repo rate unchanged at 6.50 percent on February 8, 2024, and it is expected that the central bank will keep the repo rate unchanged in the monetary review of April and June 2024 also, as inflation remains at high levels. However, policy rates may be cut in the monetary review of August 2024, because by then there may be some moderation in inflation. Despite this, it will depend on the positive movement of monsoon, the policy adopted by the Federal Reserve Bank, the status of revenue collection etc.

According to the Ministry of Statistics and Program Implementation, Consumer Price Index (CPI) based inflation increased to 5.69 percent in December 2023 from 5.5 percent in November 2023, 4.87 percent in October, 5.02 percent in September and 7.44 percent in July. However, it is within the tolerance range set by the Reserve Bank of India, which is 2 percent plus or 2 percent minus than 4 percent. Nevertheless, this rate cannot be considered at all encouraging for fast growth. The Wholesale Inflation Index (WPI) also increased to the level of 0.73 percent in December, which is the highest level in the last 9 months. 

The wholesale inflation rate in the month of March was 1.34 percent, which was 0.26 percent in November and minus 0.52 percent in October.

Inflation plays an important role in determining one's purchasing power. For example, if the inflation rate is 10 percent, then Rs.100/- earned will be worth only Rs.90/-. It is worth noting that due to inflation the percentage of investment in the country decreases because it reduces the value of money. When inflation increases, the prices of both goods and services increase, due to which the purchasing power of the individual reduces and the demand for goods and services decreases. Then, their sales decrease, their production decreases, the company incurs losses, workers are laid off, employment generation decreases, etc.

The parameters for setting economic parameters in India are slightly different from those in other countries of the world, hence, inflation in India remains moderate despite remaining within the tolerance set by the central bank. Hence, the Reserve Bank of India has decided to keep the repo rate unchanged in the monetary review. The Central Bank is very sensitive about inflation, and it wants to keep the economy strong by maintaining a balance between inflation and growth rate.

The Reserve Bank of India has estimated inflation to be 5.4 percent during the financial year 2023-24, while inflation is estimated to be 4.5 percent in the financial year 2024-25. It is estimated to be 7 percent in 2023.24, whereas the Central Bank had earlier estimated the GDP to be 6.7 percent during this period. This data shows that in August & thereafter, the pace of inflation may be down & pace of development may increase. 

There has been an increase in revenue collection in the financial year 2024-25 and tax and non-tax revenue collection is likely to increase in the coming months also. Goods and Services Tax (GST) collection has also remained above Rs.1.5/- lakh crore continuously for the last 6 months. Therefore, it is believed that the government can take less borrowing during the financial year 2024-25, which is likely to reduce the fiscal deficit.

The Reserve Bank mainly tries to fight inflation by increasing the repo rate. When the repo rate is high, banks get loans from the Reserve Bank at affluent rates, due to which banks also give loans to customers at expensive rates. By doing this, the liquidity of currency in the economy reduces and due to people not having money in their pockets, the demand for goods reduces. Due to high prices of goods and products, their sales also decrease, due to which a decline in inflation is recorded. Similarly, when there is a slowdown in the economy, efforts are made to increase the liquidity of currency in the market to accelerate the developmental works and for this also the repo rate is cut, so that the banks can get loans from the Reserve Bank at cheaper rates and get affordable loans. 

After getting the loan at affordable rate, the bank should also give loan to the customers at a cheaper rate.

Inflation has a negative impact on the GDP growth rate, but despite the loan interest rates remaining at a high level for the last few months, loan distribution is increasing, and the pace of growth also remains fast. Well, such a situation is an exception & it is happening in India owing to the positive environment in the country & appropriate policies adopted by the Government as well as by the Indian banks. 

According to credit rating agency ICRA, the credit growth rate of banks on year-on-year basis was 16.5 percent in December 2023, which is estimated to be 12 to 13 percent in the financial year 2024-25. Currently, the aim of the Reserve Bank is to accelerate the pace of development by maintaining a balance between growth and inflation, so that the common man does not face any problems and the pace of development also remains positive.