World on Fire with Inflation, RBI Hems and Haws

Beyond the dress-and-dodge, here are some facts for consideration. The RBI is directed by government to target consumer price inflation at 4 per cent — with a lower tolerance limit of 2 per cent and an upper tolerance limit of 6 per cent. What do the facts show? CPI has been above 4 per cent for over a year and since January, it has breached the 6 per cent tolerance limit.

Every rate hike challenges the interest rate differential that India enjoys to attract capital. Already foreign institutional investors have pulled out over Rs 40,000 crore every month of this calendar year. Inflation triggers a flight to safety and this is visible in the slide of tech stocks and even Bitcoin.

It is true that the macro fundamentals are challenging — debt to GDP ratio is over 86 per cent and gross government borrowings (Centre and States) would cross Rs 24 lakh crore. But just as uncertainty is a base case for central banks, so is the state of the political economy. It is what it is.

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