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RBI, government likely to tighten policies to curb inflation

With swelling inflation the biggest worry for the Indian economy at the present moment, the Reserve Bank of India (RBI) may further tighten the money supply and the government may take supply-side measures to shield people from price rise, two senior officials has said.

Inflation breaching the tolerance level concerns both the government and RBI, and they will not hesitate to take fiscal or monetary measures to tame inflation, the officials added, requesting anonymity.

The official upper tolerance level of inflation, measured by the Consumer Price Index (CPI), is 6%, which has been breached for last three months – 6.01% in January, 6.07% in February, and 6.95% in March. The inflation rate in April is estimated to jump to an 18-month high of 7.5%, according to a Mint poll of 24 economists. A Bloomberg poll of economists expects the number to be 7.43%. The official inflation data is scheduled to be released on Thursday.

Officials aware of the developments in the Union government and the central bank said while the Centre has taken supply-side measures such as reducing import duties on edible oil and slashing excise duty on automobile fuels, RBI has taken monetary measures to check inflationary pressures.

One of them, who is involved in maintaining a balance between inflation and growth, said responses of both fiscal and monetary policies must be measured as an excise duty reduction would lead to more borrowing. He, however, said that inflation is rising mainly because of external factors – the war in Ukraine, global supply chain disruptions, and zero-Covid policy in China.

“The inflationary pressures that are hitting us are outside everyone’s hands (in India), as three-fourth of the CPI is at war risk,” he said, adding that both the central government and the central bank are taking all necessary steps.

The Monetary Policy Committee (MPC) of RBI held an unscheduled meeting on May 2 and 4 and announced a 40 basis point hike in repo rate and a 50 basis point hike in the Cash Reserve Ratio (CRR), taking the respective values to 4.4% and 4.5%. One basis point is one hundredth of a percentage point. The hike, the first in 45 months, comes a month before RBI’s next scheduled meeting on June 6, which will squeeze demand by reducing the money supply to check inflation.

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