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Letter to BS: Govt measures must balance fiscal-monetary policy mismatch

The government will have to listen to the RBI's plea for supportive fiscal policy measures

Business Standard  |  New Delhi 

Reserve Bank of India | File Photo
Reserve Bank of India | File Photo

This refers to the report “Retail inflation surges to 7.35% in Dec, a 5.5-yr high” (January 14). The next three weeks will see analyses of the reasons for overshooting the upper limit of the inflation target accepted by the Reserve Bank of India and the possible implications thereof on the February deliberations of the It may be recalled that it was under the able leadership of Raghuram Rajan that the statutorisation of the happened and a conservative and flexible moving inflation target of 4 plus or minus 2 per cent with different milestones achievable at different points of time was accepted the RBI.

The understanding was, the RBI would explain the reasons for the non-achievement of the inflation target if it happens. So, in all probability, when the MPC meets in February, there would be deliberations about the possible reasons for the rising trend in inflation and perhaps a plea for revision of the inflation target bargaining time for measures to bring the inflation down from the present level.

The government will have to listen to the RBI’s plea for supportive fiscal policy measures for the above efforts, as the instrument of interest rate as a weapon to manage inflation has become blunt due to various other developments in the financial sector. The Budget 2020-21 might give some broad positive indications about what measures the government has in mind to balance the fiscal-monetary policy mismatch. It would be perilous if the government leaves this issue open and proceeds with the usual first-aid approach.

M G Warrier, Mumbai

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First Published: Tue, January 14 2020. 21:49 IST