Alluding effect of inflation in indian economy

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India’s GDP is estimated to have increased 7.2 per cent in 2017-18 and 7 per cent in 2018-19. Its performance has been quite stable in last 6-7 years after recovery from impact of global financial recession. Similarly, the Indian economy has witnessed a gradual transition from a period of high and variable inflation to a more stable and low level of inflation in the past five years, according to the Economic Survey. The current phase of low inflation is also marked by a reduction in both urban and rural inflation. It also introduced a concept of Rational Investor Ratings Index. RIRI combined two elements: (i) growth, which crucially determines rewards and returns; and (ii) macroeconomic stability (which proxies for risks). The Macro-Economic Vulnerability index includes a country’s fiscal deficit, current account deficit, and inflation. Importance of Macroeconomic stability Investors like macroeconomic stability. If the economy is not well-managed, financial markets react negatively, at times even disproportionately, making economic management a lot more difficult, which can lead to a full-blown crisis. In 2013, India was struggling with high inflation and high current account deficit. However, since then, fundamentals have improved a great deal and macroeconomic indicators now look less vulnerable. Inflation has come down, the current account deficit is under control, and the government has committed itself to a lower fiscal deficit target. Differently put, for economic activity to prosper, among other things, it is important that inflation is low, government finances are handled well, imbalances are avoided on the external front, and the financial system is stable.

Former RBI Governor Raghuram Rajan has pointed out, inflation robs the earnings of the poor and just about anyone with a fixed income. “Inflation is the silent killer because it eats into pensioners’ principal, even while they are deluded by high nominal interest rates into thinking they are getting an adequate return”. On one hand, Inflation targeting has, in part, helped keep inflation in check. India formally adopted an inflation target in March 2015. This came after a committee headed by Ex governor Urjit Patel recommended that retail inflation be made the nominal anchor for monetary policy. After discussions between the government and the RBI, a flexible inflation target of 4 (+/- 2) percent was set.

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