Inflation Is Also Contagious

Why an RBI-led rise in borrowing costs is both imminent and imperative

- Abheek Barua

Consumer price inflation in India almost touched 7% in March. It is likely to climb up further as the full effect of the global shortages in crude oil, metals and farm products (like oilseeds and wheat) on the back of the Ukraine war kicks in.

Forecasters are predicting inflation rates of 7% or more for at least seven more months with a peak of around 8% in June. Wholesale price inflation that measures factory and farm gate prices looks even more grim, printing at 14.55% for March.

Why fret over a 7-8% inflation rate when the economy has seen much higher inflation rates in the past? In 2013, for instance, consumer inflation crossed 12%. For one thing, the period of high inflation in the early 2010s brought considerable agony to both households and businesses. The objective of the current inflation management policy is to ensure that we do not revisit this period in history.

In fact, the experience of the early 2010s forced a complete rethink on the ways to keep prices in check. A key outcome was the government’s decision to mandate RBI to keep CPI inflation in a range of 2-6% and ideally target the midpoint of 4%. Current inflation has busted the upper limit of this range. Does this call for urgent action by RBI?

In normal circumstances, central banks have a ready formula for taming inflation. This assumes that price increases reflect excess demand for goods and services riding on high economic growth and low unemployment. The logical response is to tamp demand down through higher interest rates.