MANAGING THE TRADE-OFF BETWEEN GROWTH & INFLATION

The RBI and the government will need to ensure that attention to growth does not hamper the return of the inflation trajectory to manageable levels

- TULSI JAYAKUMAR

IN its monetary policy statement on 8 October 2021, the Reserve Bank of India unanimously decided to keep the policy repo rate unchanged at the historic low at which it has been held since May 2020—4%. All members of the Monetary Policy Committee (except one) also agreed to keep the monetary policy stance accommodative “as long as necessary” so as to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward. Clearly, the short-run growth-inflation trade-off is playing itself out, as one witnesses the economy trying to move along the growth path, even while the inflation trajectory refuses to inspire confidence. The RBI’s policy stance is based on its reading of the inflationary situation as one that is driven by supply-side factors, with the demand remaining weak.

Two questions arise: How robust is the RBI’s reading of the inflation situation in the economy? How can the government and the RBI help in minimising the growth-inflation trade-off while it gives priority to growth?