Inflation is rising differently in different countries. In a piece for Mint, Dr Niranjan Rajadhyaksha, Executive Director, Artha Global, opines that the interest rate and RBI’s balance sheet management are the two instruments for controlling inflation that should be watched closely.
Excerpts below:
“The Reserve Bank of India (RBI) began the year with a relatively sanguine outlook on inflation. It has since moved rapidly, increasing its main policy rate by 90 basis points since the beginning of May. More rate hikes are now expected through the rest of the year. The repo rate is still 170 basis points lower than the expected average inflation for the current fiscal year.”
“However, interest rate policy is not all. Like its peers in other countries, RBI will have to manage its balance sheet as well. The RBI balance sheet has shrunk by ₹3.3 trillion—or 1.4% of nominal GDP—since October 2021. Much of this reduction has been driven by a recent loss of foreign exchange reserves, though rupee depreciation has helped soften the impact on the central-bank balance sheet in terms of Indian currency. A smaller balance sheet, both in terms in absolute numbers as well as a proportion of nominal GDP, will impact liquidity in the domestic financial system, though that also has other drivers such as currency in circulation and government cash balances with the central bank.”
Read the full article here.
