Rising inflation has raised an alarm for the economies globally including India. The price hike has hit consumers across the nations impacting their purchasing power. India on other hand, has managed to keep inflation rates under control since the beginning of the year and aims to keep it steady through 2022. Duvvuri Subbarao (Subba), Ex-Governor, The Reserve Bank of India (RBI) shares his views on tightening monetary policy to keep the inflation expectations under check, UPI as the new-age payment mechanism, and why the falling rupee is not a cause of immediate concern.
Factors impacting inflations rates
There are several factors that impact the economic fluctuations in and out depending upon the policy framework, conducive business environment, and global activities. Duvvuri Subbarao (Subba), Ex-Governor, The Reserve Bank of India (RBI) says “Inflation rates in India have been at about 6 percent since the beginning of this year and the Reserve Bank of India (RBI) expects it to be steady for the rest of the year. It is working on tightening the monetary policies regime rising into splits to bring the inflation down to the target band.”
A lot of people argue that inflation today is driven by supply-side pressures such as rising prices of commodities, fuels, etc., how can monetary policy tightening control inflation when the driver of inflation is supply-side pressure?
The answer to that question is when inflation is high, inflation expectations get higher, so no matter what the driver of inflation is, the first line of defense must be the monetary policy to ensure that inflation expectations are not unhinged.
I believe that is the primary motive for RBI today to tighten the interest rates even though the driver of inflation is supply-side pressures. So, the tightening will continue for some upcoming months, he further adds.
“When inflation is high, inflation expectations get higher, so no matter what the driver of inflation is, the first line of defense must be the monetary policy to ensure that inflation expectations are not unhinged.”
Important to make UPI user-friendly for everyone across the nation
Duvvuri Subbarao (Subba) considers the Unified Payments Interface (UPI) to be a remarkable innovation as it is recognized internationally as a payment system accessible to millions. The confidence in people to adopt it for transferring money has been a remarkable feat for financial inclusion. How can industry benefit from it and contribute to it is the built-application space area.
The industry needs to build applications-based UPI which are user-friendly and can be used by people with low literacy, and low awareness and with confidence, and trust, he believes.
Depreciating rupee: painful but not an immediate cause of concern
Duvvuri Subbarao (Subba) states “Yes, the rupee has depreciated by 6 percent over the last year, but you must also know that the rupee depreciation is a sign of dollar strengthening. The rupee itself has held its own against several other currencies as well. So, I don’t believe that the current depreciation trend is any cause for alarm. It’s going to be painful in terms of certain aspects.”
Going by the current situation of the rupee, a situation like the one in 2013 is not in sight. There are several reasons for it, first because there is no hidden pressure with the rupee exchange today. Another reason is there are macro fundamentals, particularly our fiscal and current conduct of the da are much safer. Our fiscal stance has more credibility.
The current economic debt is expected to stand at 3 percent. The other reason is our forex reserves are historically high level. No matter what metric you use they are all very safe trajectories, he further adds.