The high inflation is making everyone nervous, and so the bond market is panicking everyone. Macroeconomic instability at this junction is critical and is the last thing is the economy can ill afford.
Various economists, including authors, believed that the government had more room to spend support to the faltering growth.
Some arguments that the government should borrow from RBI if required where the chief economic advisor stated previously that there could be the second round of stimulus at the appropriate time, but if high inflation persists, such would be off the table.
Most of the analysts agreed to the probability of an October policy rate reduction is now remote. Since the last six years, the Modi government constructed a reputation and praise for its proactive supply management that reduced food inflation.
Persistent high food inflation since November 2019 could puncture that claim. Food inflation was high even before Covid -19 and never goes in line with RBI’s expectation in January March 2020 quarter. The real risk is persistence and its impact on expectations getting excavated.
The country is overflowing with wheat and rice stocks and the spree of free rice and wheat distribution to nearly 80 million people since March 26.
This is an extraordinary market interfering by any measure and anywhere in the world. The government also distributed free pulses, but there was no sign of price easing, in fact, the prices got doubled.
This may reflect some cost-push, exceptionally high in diesel and fertilizer prices. The Covid oil price crash has fully exhausted, thus forcing farmers to pass costs entirely.
It would be indiscreet to relax and ope that prices would make self-correct once rigidities ease ahead. But for a durable impact for yield, the government has to deploy its full supply management sills to reobserve the food prices.