Ignoring the risk of inflation will increase macroeconomic costs

- The risks of maintaining a high liquidity level in the market are likely to outweigh the potential benefits

Inflation is based on the Reserve Bank of India's range based on the Consumer Price Index. Like the central banks of developed countries, the central bank of India has declared high inflation to be temporary. Supply Sector Limits Inflation levels have remained high due to epidemic restrictions, high margins and taxes. The central bank's move is aimed at supporting economic recovery. Although the second wave of Covid-12 had a limited impact on economic activity, it has significantly affected the recovery process.

In the current economic scenario, the RBI wants to keep market interest rates relatively low. So that commercial borrowers can get more credit at a lower cost. To keep market interest rates low, the central bank has poured large amounts of cash into the system. For this he has adopted both traditional and unconventional methods. Due to high liquidity and low rates, the government is able to take loans at low interest rates. The rationale for the policy adjustment is well understood and the central bank has taken a number of steps in the early stages of the epidemic.

Certainly the situation in India is quite different from that in developed countries. Inflation rates in those countries have been low for a long time and estimates are being taken into account. This is being discussed in the U.S. and in the U.S. Central Bank, Federal Reserve officials are keeping pace with the upcoming data India has a history of high inflation. Last year, for example, the average rate was also above the prescribed limit.

The Reserve Bank should clarify how it views the recent rise in inflation. Because it is expected to remain elevated for some time to come. As a result, the Monitoring Policy Committee will have to revise its inflation forecast for the whole year to 7.1 per cent, which is far beyond the target of 5 per cent. The MPC should also discuss that in addition to the fact that excess liquidity in the system is affecting inflation findings, lower interest rates have not been reflected in the form of higher credit growth. Thus, the risks of maintaining high liquidity levels may outweigh the potential benefits. Continued disregard for the risk of inflation can increase long-term macroeconomic costs. In such a situation, the RBI Clarification from will be very important.

Sudden changes in policy can have unintended and inconsistent effects, so financial markets expect the RBI to issue a blueprint to bring the policy back to normal. The next step should be to gradually reduce the level of liquidity in the system and bring rates within the scope of monetary policy.