Former Reserve Bank of India (RBI) governor, Raghuram Rajan, has issued a warning that the RBI’s ongoing battle against inflation will likely continue to be complicated by consistently high core inflation.
Core inflation is the portion of overall inflation that excludes food and oil. Since, food costs have decreased, which is generally what happens in the winter, Rajan argued that the problem with inflation is disinflation. The lowering of food and commodity prices was cited as the cause of the decrease in inflation.
He further remarked, we should be ready to perhaps return to a low inflation paradigm. From 5.88 percent in November, India’s headline retail inflation rate decreased to a one-year low of 5.72 percent in December.
With the decrease in December, the Consumer Price Index (CPI) inflation rate has decreased for three months in a row. The RBI’s 2-6 percent mandate has been exceeded for the second consecutive month, as well. The CPI inflation rate has now gone over the medium-term target of 4% for 39 months in a row.
Rajan also warned other Indian banks about their aggressive approach to retail lending and highlighted the risks involved in the case of a downturn.
In his words, he questions, Indian banks are focusing more on lending to consumers.
The former governor’s remarks take on relevance in light of Indian banks’ recent aggressive retail bet. When compared to wholesale loans, retail assets have increased significantly for the majority of banks. He emphasized the prior issues with infrastructure lending and stated that banks must ensure that all associated risks are examined.
The main problem, according to Rajan, is that commodities prices have been falling as a result of the lockdown in China. Further, he added that if China’s economy starts to recover, European countries would also start to experience problems. On the fringes of the World Economic Forum in Davos, the former governor of the Reserve Bank of India said that for China’s economy to expand again, private sector growth must be restored. He further stated that central banks should reduce inflation to the desired level.
1. What effects does inflation have on the banking industry?
Generally, during times of high inflation, bank stocks underperform. This is due to the fact that rising inflation rates cause interest rates to rise, which can reduce bank profitability.
2. What are the RBI’s primary roles?
General oversight and management of the business of the Bank, it acts as the Financial Supervision Board, currency issuer.