Worrisome Trends in Inflation and Unemployment

Now that the second wave of the pandemic has ebbed, the policy focus is slowly reverting to the economy. The economic relief package of `6.29 lakh crore announced by the government, mainly to provide credit to business, is a pointer to this. This is also in tune with the official line that, despite the massive toll on lives, the second wave has caused only a temporary setback to the economy. In its monetary policy statement (MPS) in early June, the Reserve Bank of India (RBI) revised down the first quarter growth in 2021–22 by a third to 18.5%. But the forecasts project a largely stable or even higher growth over the next three quarters. And the lack of high frequency official statistics on employment losses has been conveniently used to blank out livelihood issues, albeit a small provision for free food.

So, the June MPS remained focused on reviving and sustaining growth. It has left policy rates at an all-time low of 4% for around a year now. And the central bank also vouched to continue the accommodative monetary policy as long as necessary. Unfortunately, this stance, which prioritises growth over inflation, has been guided by the mistaken expectations that inflation will remain within the targeted band as supply-side constraints ease in the coming months. And trends in the consumer price index (CPI) in the five months up to April, in fact, validated this argument. But this argument soon fell flat. The most recent CPI numbers for May, released after the June MPS, saw inflation surge back above the mandated upper limits to 6.3%, raising apprehensions about the monetary policy stance.