The inflation is on the rise in Jammu and Kashmir and elsewhere. In the overall context, it is alarming across India, currently riding at 7.61 percent. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) last week announced its decision to hold the benchmark repo rate unchanged at 4%.
Raising interest rates had been the traditional monetary policy response to check inflation and given the fact that India is technically in a recession, the policy-makers of the RBI were not expected to use that blunt instrument.
The RBI has on the other hand vowed to stick with its ‘accommodative’ policy stance in the next fiscal year to help support economic recovery amid the covid-19 pandemic. This is a signal that inflation shall remain elevated. The RBI hopes that there could be some relief in the winter months from “prices of perishables”. As per the RBI, it “constrains monetary policy at the current juncture from using the space available to act in support of growth”.
Liquidity has been hit hard in the financial system. The net durable liquidity surplus in the system has swollen to over Rs 8 trillion as on November 6 from Rs 2.56 trillion in March when India went into its first lockdown which an increase of over 213 percent.
The problem, as per the experts is that at a time when banks are looking to play safe and industry is reluctant to borrow, the deluge of money is winging its way back to the RBI through its reverse repo window. Banks still have surplus funds that they are deploying in the money markets where interest rates have tumbled below the reverse repo rate of 3.35 percent, raising questions about the effectiveness of the policy rates. The problem of surplus money is compounded by the fact that foreign investors have been pouring money into Indian equities and debt markets.
The guiding principle within the central bank to deal with such a situation is to start longer term repo or reverse repo operations as these have no discernible impact on bond yields.
The faster retail inflation is indicative of prices of household items rising quickly. While inflation affects everyone, as it is offend referred to, the ‘tax on the poor’ is taxing on low-income stratum of society. Persistent high inflation pushes several items out of reach for this category of consumers.