The global credit rating agency, Moody’s Investors Services, went on record early this month to say that the mechanism and checks adopted by India to target inflation are “credit positive” moves. In the course of appreciating the Centre’s proactive approach to curtailing inflation and the Reserve Bank of India’s monetary policy, Moody’s said that these measures would make the tools employed by the central bank extremely effective. Unlike the past, the focus is now on accurate predictions in a changing economic scenario rather than factoring in historic price changes that may not be the trend. Earlier this month, a Moody’s representative said, “Quantitative inflation targeting will foster transparency and predictability in monetary policy, as capital market participants, businesses and the public understand the drivers of central bank actions”. The agency also said that increased transparency in the monetary control mechanism is likely to attract increasing number of foreign investors into the country and that global capital flows into the economy will now be less volatile. India has been assigned a Baa3 rating by Moody’s – the lowest investment grade rating. Standard and Poors, and Fitch Ratings, the two other global credit rating agencies, have both assigned India BBB – rating with a stable outlook.
More recently, International Monetary Fund (IMF) has also lavished praise on India, calling it a ‘bright spot’ in the global economy. “The Indian economy is the bright spot in the global landscape, becoming one of the fastest growing big emerging market economies in the world”, said a recent IMF report. The inflation checks, economic reforms, and attempts to improve the fiscal position of the country were appreciated after Article IV consultations – Comprehensive consultations of IMF economists with any country’s fiscal policy makers.
RBI’s Plans to Fight Inflation
Ever since taking over as RBI Governor, Raghuram Rajan has taken a rather hawkish stance on the traditional concern of inflation. The central bank said that the inflation had skyrocketed in the past three years, egged on by food and consumer prices. The RBI has made use of credit rates to bring down inflation and stimulate growth. The central bank also announced that the inflation would be brought down below 6 percent by January 2016, and the target of 4 percent would be achieved by January 2018. The RBI will come up with a documented policy twice a year. The policy shall predict the inflation forecast for the next 6 to 18 months. It shall detail the sources of inflation and the plans to target these. It shall also look at the past predictions – their success or causes for failure.
According to current news reports, India’s consumer inflation rate for February has risen by about 5.37 percent, vis-à-vis January’s 5.11 percent, a disappointment in the face of these inflation curbing measures. Wholesale prices seemed to have declined, though. January’s industrial growth, as recorded by the IIP has also slowed down to about 2.6 percent. These new announcements about the inflation levels are likely to ascertain the course of RBI’s outlook for the next few months and it seems that another rate cut in the near future is unlikely.
There are some worries that unexpected rains in March and an increase in global oil prices may be major obstacles in the government’s plans to check inflation. Food inflation may rise with increase in vegetable prices in the summer months.
Sustained Inflation Checks May Cause Concerns
While burgeoning inflation rates had been considered the greatest economic concern faced by the country by many, some economists believe that a sustained low inflation level will equally hamper the country’s growth. With decreasing inflation, rural purchasing power – something that has been on the rise over the past decade – shall dip lower. With agriculture still weighing in as one sector that employs the most people in the country, sustained inflation checks shall affect the earnings of rural India. This in turn shall harness in production and cramp overall growth. This is another factor that the Finance Ministry and the RBI will need to account for in framing the monetary policy of the country’s economy.
While the government still seems far from worrying about deflation, falling inflation levels did cause unease with regard to flagging growth. The corporate world was growing restless and the RBI responded with a 25 bps rate cut. Equity markets were jubilant over the development. According to reports from India’s economic survey, the economy is set to expand at 7.4 percent in the current fiscal year. The Finance Minister of India, Arun Jaitley has set a target of 8.5 percent growth for FY 2015-16.