Our inflation fight calls for a fiscal pullback too

Source: The post is based on the article “Our inflation fight calls for a fiscal pullback too” published in “Live mint” on 9th October 2023.

Syllabus: GS3- Economy- inflation

News: The article discusses the Reserve Bank of India’s strategies under Governor Shaktikanta Das to control inflation, keeping it at 4%, and its impact on the market, amid challenges like volatile global crude oil prices and geopolitical instability.

What is the RBI’s current stance on inflation?

Clear Target: RBI, under Governor Das, is aiming to achieve a 4% inflation rate, making it a clear, defined goal.

Recent Inflation Data: The retail inflation was slightly troublesome at 6.8% in August, and RBI is focused on bringing it down.

Unchanged Repo Rate: The repo rate is kept steady at 6.5% to maintain a consistent policy.

Selling Government Bonds: RBI plans to sell government bonds in the open market as a strategy to manage monetary conditions and indirectly control inflation.

What challenges does the RBI face in controlling inflation?

Volatile Oil Prices: The conflict in West Asia is causing global oil prices to fluctuate, which can impact India’s inflation.

Geopolitical Instability: Events like the unrest in West Asia create uncertainty and can affect various economic factors, complicating inflation management.

Fiscal Policy Decisions: The government’s spending and fiscal policies, especially with the goal to reduce its budget deficit to 4.5% of GDP by 2025-26, will influence inflation and RBI’s strategies.

Upcoming Elections: With general elections scheduled in 2024, there could be shifts in governmental spending, which could disrupt RBI’s efforts in controlling inflation.

Global Economic Conditions: U.S. short-term bonds now yield 5%, and such global economic variables might influence the Indian financial market, presenting additional hurdles for RBI’s inflation management.