Growth or Inflation - what should be RBI’s current priority?

Growth or Inflation - what should be RBI’s current priority?

In the recent time, owing to high inflation RBI has shifted its focus on curbing inflation. As a result it has tightened the monetary policy by increasing the key policy rates. It’s been more than 3 years but the RBI’s effort has not given any permanent solution. Inflation rate still continues to fluctuate and remains more than the threshold level of RBI. On the other hand, this tight policy has seriously shackled the industrial sector, which has shown negative growth in the last many quarters. After the regime change at centre, finally we are seeing a positive growth in industrial sector. Growth rate too attains the positive trajectory. There is a widespread optimism about Indian economy throughout the world. Under such circumstances, should RBI slash monetary policy rates for better growth or stick to its emphasis on curbing inflation?

Growth:

-Indian economy is reviving quickly and recent data of GDP growth is encouraging. So RBI should keep the momentum going by slashing policy rates.

-RBI has done enough on its part to curb inflation. Other factors such as supply side bottlenecks etc. are totally in government’s domain. So RBI should concentrate more on the growth aspect and let the government do its share for efforts in curbing inflation.

-To revive the industrial production, demand in the economy needs to be enhanced which can be done by RBI policy rate deduction and increasing liquidity in the market.

-Owing to high policy rates, fund available with the banks for loan dispersal has decreased. This in turn limits the investment capacity of industrialists.

-If government’s efforts are not supplemented by RBI to bring back the economy on the right track, then the opportunity this positive environment has generated will be lost.

Inflation:

-High inflation rate directly impacts people especially the low income group section. Since most of the population belongs to this section, therefore RBI has prioritized the concern of this section i.e. inflation over growth.

-Continuous government efforts have failed to check inflation whereas RBI’s effort has been quite successful in maintaining the rate of inflation below double digit mark.

-RBI’s continuous tough stance on inflation and reluctance to lower the policy rates has reflected that the steps taken by government to curb inflation are inadequate. The stance has also forced government to take serious dedicated efforts towards curbing inflation

-Persistent high rates of inflation affects economic growth negatively as inflation decrease the savings available with people. Therefore RBI’s tough stance will ultimately revive growth.

-India has infrastructural bottlenecks, lack of proper tax regime and other issues which have to be dealt by government. Only insisting on RBI to lower policy rates without unfolding reforms to sort out these issues will not give expected results both to government as well as to industries.

Conclusion:

Though RBI has dealing with this issue of growth v/s inflation for a long time, but the positive changes that are now happening in the economy needs to be supplemented by RBI for the long term stability. It’s true that inflation is bad for the economy as well as for the common man, but RBI has a limited role in curbing inflation and many experts believes that RBI has already crossed its limit. Therefore, RBI has to give enough attention to growth along with inflation so that the momentum in the growth will continue and the economy once again attains its growth potential to fullest extent.