Inflation Volatility is a challenge

Prelims level : Economy Mains level : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
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In News:

  • Amid a growing demand for a reduction in interest rate in the upcoming monetary policy review scheduled for February 7, Reserve Bank of India (RBI) Governor said wide divergences and volatility in inflation pose challenges for its assessment.


  • The case for a rate cut has been cited by economists and industry lobbies on the back of a sharp fall in retail inflation in recent months with the latest data showing December CPI inflation at 2.2%.
  • Although headline inflation has moderated significantly in recent years, its major components — inflation in food, fuel, and inflation excluding food and fuel are exhibiting wide divergences this year.
  • While food inflation has turned negative since October 2018 and fuel inflation has been highly volatile, inflation, excluding food and fuel, remains sticky at close to 6% wide divergences and large volatilities’ pose challenges for inflation assessment
  • Balancing the objectives of inflation and growth under a flexible inflation targeting framework would warrant careful analysis of every new data,
  • In the last policy review meeting in December, RBI kept the repo rate unchanged at 5% and continued with the stance of calibrated tightening.
  • Maintaining price stability in the economy was a basic mandate for a central bank, the Governor acknowledged that easing of global crude oil prices augured well for inflation outcomes. On the external front, a close monitoring of external sector was required, given the sharp movements in global crude oil prices and global financial market volatility. Because these are the two global shocks that have implications for our CAD and financial flows.
  • The progress on the bankruptcy framework has been ‘encouraging’ and has resulted in better recovery. He said till January 3, 2019 the resolution processes have been approved in 66 cases, involving about 80,000 crore as resolution value to creditors.
  • Banks had improved their profitability ratios and capital positions and also the provision coverage ratio which increased to 52.4% in end-September 2018 from 3% in end-March 2018.
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