Growth and inflation: Hard choices vs easy trade-offs
RBI should have been. Based on the shocking jump in July’s inflation to 7.44%, they should have been. Consider one Monetary Policy Committee’s (MPC) member’s statement as recorded in the minutes of the June 2023 meeting.
Jayant Varma, an external member, noted the following: "Monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy." With every successive meeting, he added, the current policy stance “is becoming more and more disconnected from reality". In his monetary policy statement, the governor projected the inflation for the year at 5.4%; the numbers for July must have been a rude shock. The central bank’s estimated inflation for the second quarter – July to September – is 6.2%.
After July, that seems rather unlikely. Almost every other central bank of the major economies is worried, if for different reasons. Despite a decline in inflation, Fed chair Jerome Powell raised the Fed funds rate – the policy rate in the US that is the equivalent of the RBI’s repo rate - again.
The latest inflation number for July showed an increase, but overall, inflation is slowing. In Japan, after decades of almost zero policy interest rates, the Bank of Japan’s Governor made changes to its yield curve control (YCC) policy, in essence, tightening it. In Europe and the UK, inflation remains a serious concern among central banks.
True, monetary policies among the major economies are no longer as coordinated as they used to be; each country is choosing its own path. India began ‘de-coupling’ earlier than the rest. This also suggests that the dynamics driving inflation are changing.
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