“Inflation is taking too long to get back to target,” told Gita Gopinath, first deputy managing director of IMF to the ECB’s annual forum in Sintra, Portugal, which, according to her, warrants that “central banks, including the ECB, must remain committed to fighting inflation even if that means risking weaker growth or much more cooling in the labor market”.

She even feared that structural factors such as redesigning global supply chains, geopolitical tensions, and climate change may further prolong inflation. Obviously, all this points to the risk of “inflation getting entrenched” and thus the scope for returning to the ultra-low interest rates that prevailed during the pre-pandemic is less likely.

Recalling the experiences of the high inflation period of the 1970s, she, while addressing the annual conference of the Central Bank of Brazil, also cautioned that “Central banks must remain resolute in keeping policies tight and recognize that insufficient monetary tightening now may necessitate even more painful actions down the road”.

It is needless to say here that fiscal restraint will go a long way in aiding central banks’ fight against inflation. For, in an environment where the growth outlook is uncertain and the rates of interest are likely to stay higher for longer, there is every need to observe fiscal restraint. Else, there is a danger of financial market instability.

As against these happenings in the developed world, emerging market economies, aided by well-orchestrated monetary policies and reforms, are reported to have maintained growth in recent years. Nevertheless, owing to the tightening of monetary policies by the developed countries, emerging economies may still face “considerable downside risks” that may worsen the conditions.

Against this global scenario, Indian consumers are continuing to struggle to cope with a sharp rise in the prices of kitchen essentials such as vegetables, rice, pulses, etc. This overall rise in prices across a wider food basket is perceived by a few analysts as a reflection of the unsettling build-up of underlying inflationary pressure in the economy.

The retail inflation data released by the government for May reveals that prices of pulses have reached a 31-month high of 6.56%. And the stock limits imposed by the government on traders of lentils appear to have had little or no impact on their price behavior. Similarly, there is also an increase of 19% in the price of rice. Of course, there is always the element of seasonality of crop arrivals to market playing a role of its own in determining the prices of agricultural produce.

It is in this context that the announcement of the India Meteorological Department (IMD) revealing a 23% deficit in the all-India rainfall in the month of June is causing concern. For, it has impacted the Kharif sowings: the acreage under paddy is reported to have come down by 5.6% vis-à-vis last year’s level, while in maize and cotton, the shortfall stood at 2% and 4.6%, respectively.

Added to it, as El Nino is in play this year, it is feared that owing to the fact of the accompanying negative Indian Ocean Dipole (IOD)—also known as the Indian Niño—conditions remaining neutral so far, there is a likelihood of a sub-par monsoon this year. If the conditions turn negative, it could cause severe drought across the country. And history is replete with instances where IMD’s long-range forecasts issued in the months of April and May turned out to be overestimates. Should this happen again, it is certain to pose upside inflation risks.

Furthermore, given the critical impact of monsoon rains on the Indian economy, delayed arrival of the monsoon and the forecasted deficiency in rainfall is certain to pose a threat not only to prices of food products but also to the growth estimates as spatial patterns and distribution of rainfall assume utmost significance. Therefore, policymakers must keep a constant vigil on the evolving IOD conditions as commented by IMD from time to time and be ready with appropriate policy measures to counter the drought-driven spike in food prices.

In a nutshell, all this calls for a close monitoring of liquidity in the system and its agile and flexible management. Of course, the Reserve Bank and its monetary authorities are well seized of the matter as is revealed by their proclamation that the monetary policy shall firmly stay focussed on maintaining price stability.

Equally important is the management of fiscal deficit, for that is what ultimately matters in managing the inflation-growth dynamic. It is reported that with the nominal GDP recovering to grow at 18.5% in 2020-21, the deficit relative to GDP stood at 85.7%, of course, a tad lower than what it was during the pandemic. Over it, the financial repression –keeping the interest rates on government borrowings low, either through mandatory investments of banks under SLR or by the RBI’s open market operations around the time when government borrowing is managed – practiced all along is certain to distort financial markets. Fiscal deficit thus being a critical issue in the management of macroeconomic stabilization, the government must cooperate with the central bank in managing inflation by enforcing fiscal responsibility among the states and as well as on its own conduct.

To conclude, it is worth remembering here that experiences of the past suggest that even a small amount of sticky underlying inflation makes the task of taming it more difficult!