Whether Increased Repo Rate & CRR Is The Only Solution To Control Inflation
RBI on Wednesday increased the Repo Rate from 4 percent to 4.40 per cent and also decided to increase the CRR by 0.50 per cent i.e. 4.00 to 4.50 per cent. Repo is the rate at which banks take loans from RBI to meet their immediate needs and CRR is the percentage of depositors' money that commercial banks are compulsorily required to keep with the Reserve Bank. RBI increases the repo rate when inflation rises. An increase in this rate of interest makes it more expensive to borrow money from the central bank and ultimately reduces the liquidity of money in the market. Due to increased CRR rate, banks will have to keep the additional amount with the RBI.
The repo rate, which fell from 8 per cent in January 2014 to 4 per cent by May 2020 due to Corona, has been raised for the first time in nearly four years. An increase of 50 bps in CRR will suck Rs 87,000 crore from the banking system.
This decision is being considered positive from an economic point of view. Its objective is to accelerate economic growth while keeping high inflationary pressures under control. However, the Equated Monthly Instalment (EMI) on home, vehicle and other personal and corporate loans is likely to increase.
Although this decision of government might be helpful in moderating the inflation which has remained above the target of 6 per cent for the last three months. Also, the returns on savings products like Bank, NBFC deposits and small savings schemes will benefit the fixed income investors. The repo rate is expected to increase by 100 basis points in the current financial year.
The Reserve Bank's Monetary Policy Committee was tasked to keep retail inflation in the range of 2 per cent to 4 per cent by March 31, 2026, but this does not seem to be happening. India is witnessing a fuel and food-led inflation.
The question here is whether this is the only option to control inflation and the answer is certainly no. The government now require to think the issue beyond political vendetta and should start taking concreate steps.
At present time the biggest reason for inflation is oil, be it fuel or edible oil, now more than ever major chunk of our earnings is being spent on oil. Fuel prices rose by 7.52 per cent in March The tax in the form of excise duty and VAT on petroleum products is close to Rs 35 to 50 per litre. If it is reduced, then the prices of these products will come down and eventually its effect will start showing on the price of everything. But the government substantiates its decision stating that the amount received from the tax imposed on petroleum products are used in welfare schemes but tax revenue collection of the government is already good at this time. In March, the government got revenue of Rs 1 lakh 42 thousand 95 crores. This is the highest in the last five years, compared to March 2021 last year, there has been an increase of 15 percent in GST collection. However still if Government sought to increase more revenue through tax it can fulfill this objective by imposing higher taxes on other items of luxury, property and corporate. Apart from this, GST also needs to be rationalised in certain categories.
Food prices should fall, the focus should be on increasing the supply of agricultural commodities. Agriculture is the only sector in the time of Covid where growth has remained less effected but now farmers are worried due to increasing prices of Diesel, gas and fertilizers. Remember, expensive food is a threat to the health of the population. The role of agriculture will always remain important for achieving food security, increasing income and generating employment opportunities. Any sustainable inflation control requires attention to agricultural production. The prices of the products of FMCG sector have increased rapidly, it is affecting millions of shopkeepers as well as crores of customers.
Now how to save people from further impact of inflation? This question is of immediate importance to us. Distributing small amounts of money to the underprivileged will not be enough to bring the economy back on track. The impact of inflation on the common people has multiple effects, which push them towards poverty and destitution. If we look at the political economy of India, inflation is a bigger issue than corruption and familyism. Controlling inflation should be the top priority of the government, the increased inflation rate has raised a serious question mark on the expected recovery that we are achieving after Covid.
