Ashima Goyal, a renowned member of the Monetary Policy Committee recently stated in an interview that the Reserve Bank's efforts to limit price rises by repeatedly raising interest rates will enable it to contain inflation, which is expected to fall below 6% in 2023.
She goes on further and explains that the policy rate hikes have largely reversed pandemic-era cuts and the real rate remains low enough not to affect the recovery of growth negatively.
She also specifies that a “two to three quarter” lag will reduce economic demand by higher real rates.
"International commodity prices are softening with the global slowdown and supply chain bottlenecks have reduced," she continued on in her telephonic interview.
In conclusion, the central government is required to keep inflation at 4% in the coming year with a 2% margin along both sides which Mrs. Goyal believes it is hardly a positive interest rate and reduces inflation through supportive supply-side action while imposing minimal growth sacrifice.
What will happen if inflation falls drastically in the next year?
Falling inflation is familiarly known as deflation and is not the bar you want to be setting for the economy as it can reduce production rate and overall wages, leading to high levels of drop in employment. An RBI Rate Hike, as predicted, can make it difficult for banks to acquire funds from the central bank which in turn forces them to raise their lending rates. This further leads to a hike in interests rates of loans provided to consumers by banks.
Can there be positive inflation, as hinted by Mrs. Goyal?
Yes, this term is called Disinflation which shows the rate of change in inflation over time. The inflation rate of an economy may decline over time, but it remains positive.
In Conclusion:
While inflation may decrease by 6% in the coming year, thus reducing the purchasing power of the country, Indian economists believe that a low, steady level of inflation can infact drive positive economic growth, so it may not be such a bad thing. Which side are you on?
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