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Even as commodity prices soften, MPC must continue to focus on inflation

Over the course of the past two meetings, the MPC has hiked the repo rate by 90 basis points to 4.9 per cent, 25 basis points lower than the pre-pandemic level.

A few weeks from now, the monetary policy committee of the RBI will hold its next meeting.

Notwithstanding day-to-day flickering, over the past few weeks, prices of several commodities have seen a moderation. Crude oil prices are now hovering around levels last seen prior to the Russia-Ukraine conflict. The Bloomberg commodity price index has also witnessed a correction. Prices of industrial metals have softened — copper, aluminum and nickel have all trended lower. International food prices have also fallen for the third straight month — the FAO’s food price index averaged 154.2 in June, down from the high of 159.7 in March, seen just after the Russian invasion of Ukraine. This souring of sentiment can be traced to fears of aggressive rate hikes by the Federal Reserve triggering a recession in the US, coupled with the softening of demand due to recent curbs in China to contain the spread of Covid. This softening of commodity prices will have a moderating influence on inflation across the world.

In India, the Reserve Bank of India (RBI) appears to be optimistic on the trajectory of inflation. Over the past few weeks, statements by the RBI governor and deputy governor suggest that the central bank views inflation as having peaked. Its latest state of the economy report says that the “worst of inflation may be behind us”. As per the report there are several indications to this effect. First, financial markets will succumb to fears of a recession considering the aggressive tightening by central banks across the world. Second, easing of commodity prices and supply chain pressures will further help cool prices. And then there is the softening of global demand.

A few weeks from now, the monetary policy committee of the RBI will hold its next meeting. Over the course of the past two meetings, the MPC has hiked the repo rate by 90 basis points to 4.9 per cent, 25 basis points lower than the pre-pandemic level. The recent softening of commodity prices will now weigh on the committee members as they chart the way forward. However, despite this moderation in commodity prices, price pressures in the pipeline remain — the wholesale price index continues to remain elevated, coming in at 15.2 per cent in June. In fact, projections by most analysts do not see inflation trending down in line with the central bank’s target over the near term. The MPC should stay the course. It must frontload the interest rate hikes to prevent the unanchoring of inflationary expectations.

This editorial first appeared in the print edition on July 19, 2022 under the title ‘See it through’.

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First published on: 19-07-2022 at 04:00 IST
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