The RBI, in an attempt to tame the consistently high inflation, has raised the repo rate by 50 basis points to 4.90%, an increase for the second time in five weeks. While hiking the key lending rate, the Apex Bank has also raised its inflation projection for the current fiscal to 6.7% which is above the upper limit of its target range of 2-6%. The inflation projection made in April was 5.7%.
RBI Governor Shaktikanta Das said the MPC had voted unanimously to withdraw the accommodative stance to ensure inflation remained within the targeted limits in the days to come. Earlier in May, the RBI had hiked the repo rate by 40 bps to 4.4%. As per analysts, India’s apex bank is expected to hike rates once again during its meeting in August. This could take the repo rate to above the pre-pandemic level. While the immediate impact of the rate hike will be seen in costlier loans, one must also look at such developments from a global perspective. Inflation has now turned into a worldwide concern, that has hit some of the most advanced economies with levels that have breached a 40-year high.
Recently, the International Monetary Fund had said that inflation is expected to remain high for a considerably longer time. In developed nations, inflation was projected at 5.7% in 2022, whereas in emerging economies, it is expected to be 8.7%. So, commodity, oil and gas as well as food prices are expected to remain high for some time. Due to the Russian invasion of Ukraine, the spike in oil and gas prices has precipitated global uncertainty, even prompting nations like India to put the brakes on its exports of wheat last month.
Sri Lanka has also been plunged into an unprecedented episode of economic despair as it witnessed days-long power cuts and serpentine queues for one canister of petrol. In most scenarios, developing nations tend to bear the brunt of inflation with devastating consequences. In India, in the event of a rise in food prices, different sections of the population are impacted differently. This is determined by the quantum of expenditure allocated towards food in a household’s consumption basket. For middle income citizens, this might imply tightening the purse strings on conspicuous consumption and non-essential investments.
However, low income households that are primarily dependent on one or two types of foodgrains could be hit hard by the impact of such spikes in food prices. Add to this, the increase in cost of agricultural inputs such as fertilisers as well as transportation costs, and you have the recipe for brewing social unrest, catalysed by large-scale nutritional deprivation. The nation must brace itself for a highly constricted growth trajectory, as evidenced by the latest World Bank report too. India’s GDP growth forecast for 2022-23 has been cut to 7.5% from the earlier estimate of 8%, a result of supply chain disruptions, geopolitical tensions and high inflation.
Going forth, inefficiencies present in the Public Distribution System need to be ironed out to ensure all-round availability of food grains to the common man. India must also accelerate its shift towards self-reliant, greener modes of commute, a transition from conventional fuels, whose scarcity is now hitting where it hurts most – the bellies of the millions who are unprotected by any economic safety net and risk being pushed into the bracket of impoverishment with every passing day.