Balancing Rising Inflation and Economic Growth

IAS Current Affairs

4 days ago

Source: PIB
GS II: Indian Economy and issues relating to planning, Mobilization of Resources, Growth, Development and Employment.

Overview

Why in the News?

The Monetary Policy Committee under the Reserve Bank of India will meet this week amid rising inflation.

Inflation has started increasing quickly, due to higher prices of crude oil and other critical imports, driven by the war involving Iran and disruptions in supply chain through the Strait of Hormuz.

Repo Rate:

The interest rate at which India’s central bank (Reserve Bank of India) lends money to commercial banks.
Banks pledge government securities as collateral to secure these funds.
When prices rise at a faster rate, the central bank rules out a repo rate hike to control inflation.
Current repo rate: 5.25%.
This is maintained to balance economic growth with price stability.

Reverse Repo Rate:

The interest rate at which India’s central bank (Reserve Bank of India) borrows money from commercial banks.
Incentivizes banks to deposit funds with the RBI rather than lending to customers, reducing the circulation of money.
When there is high inflation or excessive money supply, the central bank rules out a reverse repo rate hike to manage liquidity.
Current Reverse Repo Rate: 3.35%
This is maintained to absorb excess liquidity in the banking system and to control inflation.

What is Inflation?

It occurs when prices of goods and services of daily use, such as food, transport, housing, clothing, etc., increase.
Measured by comparing the prices of a selected basket of goods and services to those in a base year.
The percentage increase in the selected basket of goods and services represents the inflation rate.
Example: 1 kg Apple price in 2024(base year) is ₹140. And the same 1 kg Apple price in 2025 is ₹150. This represents an inflation rate of approximately 7.14%.

Wholesale inflation crossed 8%.
Retail inflation has already increased to 3.5% and is expected to rise further to 5%.
Inflation would remain within the RBI’s comfort band of 2-6%.
RBI’s stance on the rupee’s exchange rate and attracting foreign capital remains crucial.

Challenges in balancing inflation and economic growth:

The higher wholesale costs will soon lead to higher retail inflation for consumers.
Monsoon could affect the farm sector and raise food prices.
Raising interest rates could reduce India’s growth momentum by adversely affecting consumption and investment.
Current inflation is supply-driven and RBI has limited chance to boost crude oil supplies.

Significance of balancing inflation and economic growth:

Encourage sustainable production and consumption.
Balancing inflation and economic growth attracts domestic and foreign investments.
Preventing increasing inflation protects purchasing power of consumers.
Facilitating seamless industrial activity and maintaining economic growth supports employment generation.
Ensures balanced price stability and economic expansion (Macroeconomic Stability).

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