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On February 7 this year, Prime Minister Narendra Modi said that inflation was a common man’s problem and that his government had tried to handle it with utmost “prudence” and “sensitivity”. The background was high-decibel protests by the Indian National Congress and other opposition parties against soaring prices of fuels, fruits/vegetables and other daily necessities.

Ripping at the opposition and hitting Congress specifically, he said during his response to the vote of thanks on the President’s speech at Lok Sabha that the country had been reeling from double-digit inflation for most of the five last years of Congress rule, with party leaders admitting they had won. not being able to handle the situation. Pointing out that consumer inflation was 5.2% in fiscal year 2022 so far despite the pandemic, while food inflation was below 3%, he said controlling the inflation was “the main objective” of the government’s economic policy.

Even as he spoke of his government’s record in fighting inflation, markets around the world were predicting a surprise. Prices had already started to rise after October 2021 due to central bank balance sheet expansion and government allocations to reduce the impact of Covid-19 on businesses and the common man. Liquidity found its way to commodity markets and began to drive prices higher. The Russian-Ukrainian war deepened the crisis by raising energy tariffs and disrupting supply chains that were already strained due to the pandemic. The result: Inflation has reached its highest level in decades in all major economies such as the United States, Europe and Australia and has become a threat in its own right to the global economic recovery in forcing central banks to raise rates and reduce liquidity at a faster pace than previously expected. .

India is no exception. Retail price inflation hit an eight-year high of 7.79% in April. Food inflation was 8.38%, down from 1.96% in April 2021. In addition, registering a 13th consecutive month of double-digit increases, inflation based on the wholesale price index reached a nine-year high of 15.8% in April, compared to 10.74% in April. 2021. The Reserve Bank of India seems to have had a feel for the April inflation numbers. Reports say he was considering an off-cycle interest rate hike a month before deciding to bite the bullet on May 4 for fear of being seen behind the curve in the fight against inflation, especially when d Other central banks had begun raising rates and sucking up months of cash. from. So hours before the US Federal Reserve announced a hike in its benchmark lending rates, RBI raised the repo rate by 40 basis points to 4.40%, reversing the low rate regime introduced there. two years after the Covid-19 lockdown.

“Global crude oil prices are above $100 a barrel and remain volatile. Global food prices hit a new high in March and have since strengthened further. Inflation-sensitive items relevant to India, such as edible oils, are in short supply due to conflict in Europe and export bans by major producers. Rising costs of fertilizers and other (agricultural) inputs have a direct impact on food prices in India,” RBI Governor Shaktikanta Das said while explaining the rationale for the policy committee’s decision. Money Market (MPC), which also announced a liquidity withdrawal of 87,000 crore. via a 50 basis point increase in the cash reserve ratio. Market participants predict that RBI will restore the repo rate to the pre-pandemic level of 5.15% by the end of the year or even earlier. Shaken by the April figures, the government announced measures to control inflation on May 21. Finance Minister Nirmala Sitharaman announced a reduction in excise duty of ₹8 per liter on petrol and ₹6 per liter on diesel, as well as an LPG subsidy of ₹200 per cylinder. It will cost the government ₹1 lakh crore.

Essentially, a few months after the Prime Minister’s harsh speech, the tide has turned, decisively. The inversion of the interest rate cycle will have an impact on private investment and private consumption while affecting exports which have recently been a major driver of economic growth. With rising inflation expectations fueling bond yields, the government will also have to pay more for loans. This gains significance against the backdrop of plans to borrow ₹14.31 lakh crore in FY 2023, of which ₹8.5 lakh crore will be raised in the first six months of the year. This is almost double the ₹7.10 lakh crore of FY 2020. In addition, reduction in excise duty on petroleum products and other measures could affect the budget deficit target . Barclays says India’s budget deficit will exceed 6.9% of GDP in FY23, compared to a budget estimate of 6.4%.

Inflation threatens to play the villain role in India’s economic recovery story. RBI and the government have a tough battle on their hands.

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