The target inflation rate is 4 per cent in India. So, the recent Consumer Price Index-based inflation rate at 6.4 per cent is 2.4 percentage points, or 60 per cent (2.4/4 x 100) higher than the target rate. Even the core inflation is somewhat stubborn at close to 6 per cent. And yet, the Reserve Bank of India (RBI) did not raise the repo rate in its meeting on April 6. Why?
A rise in the repo rate could have hurt not only economic growth but could have also lowered bond prices. A fall in bond prices can affect assets of banks — notwithstanding the accounting norms. And, banking stability has become important in the light of the tragedy at Silicon Valley Bank in the US and Credit Suisse in Europe in recent weeks. There is now some concern in India as well, though this is often not explicitly stated.
The question is: Can we have an alternative policy that can fight inflation with fewer side effects? The answer is, yes.
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