Modi’s RBI and its myopic monetary measures

After demonetization, GST and Covid, India is still limping to a new economic normal


Even though the primary objective of the Reserve Bank of India (RBI), as mandated by the Finance Act – 2016 under the Modi Government, is to “maintain price stability” through formulating appropriate monetary policies, the RBI has miserably failed to fulfil the same.

Its incapability has become more visible in the last few months. The inflation was beyond comfortable limit of 4% for more than a year now. While the 2016 act, stipulates the permissible inflation rate at 4% with a band of plus or minus 2%, the retail inflation in India had crossed 6% mark by January itself. According to the recent statement by the RBI, the retail inflation for the month of April has not only breached 7% mark, but also reached an all-time high of 7.69%.

Modi Model and Inflation

The inflation or the price rise, in generic term, is always bad news for the have nots. Inflation is an “indirect taxation” by which the market sucks extra money from the people without any legislation. Inflation becomes deadly to people’s lives and nation’s economy when the real wages and incomes, and hence, the demand, is in decline. Since the inflation cuts into the purchasing power of the masses, consumption decreases. This in turn results in fall in demand leading to decline of business. This may further result in unemployment, under employment and increased poverty. This is a vicious cycle.

India is facing such gory economic situation since demonetisation. This Modi-made economic disaster resulted in at least a fall of 2% of GDP affecting the informal sector, the MSMEs, and the farmers where 92 % of Indian work force is employed. Even before recovering from this shock, GST was imposed which further pushed the informal sector to big chaos. The consumption data partially released and later officially withdrawn from the Modi government, during that period, showed how these policies caused decline in consumption which was lowest in the last four decades. Thus, even before the Covid  pandemic, the real wages of the people and the demand in the economy was declining resulting in the continuous decline in the GDP growth rate.

This situation got aggravated in the wake of Covid pandemic and especially by the most arbitrary and unscientific lockdowns imposed by the Modi government. While more than 4 million lives were lost due to Covid, crores of people have yet to regain their livelihood and gainful employment due to lock downs. Even for those who are in the jobs and semi jobs the wages have been decreasing in its real value.

This situation has moved from bad to worse due to the continuous increases of the prices of essential commodities like rice, wheat, edible oil, vegetables, and above all the prices of petrol and Diesel, which is in fact inflation multiplier, in the last one year. The retail inflation which is calculated on the basis of Consumer Price Index, where food basket constitutes more than 45%, has reached intolerable level of 7%. Even the prices of cement, steel, and manufactured goods are also increasing. Most crucial is the increase of prices of petroleum products, of which 85% are imported by the country. Hence part of the inflation is imported.

Inflated ego and deflated Rupee

Now that the exchange rate of rupee against the dollar has fallen to a historical low of Rs. 77.40/-, and is likely to depreciate further in the coming weeks, Indian imports are certain to become costlier, since the dollar component dominates Indian foreign trade. Because of the slump in the international commodity market, Indian commodity exports are not picking up. In spite of high  claims of the Modi government about the record exports, the fact remains that while India exported USD 417 billion worth of goods in 2021-22, the imports were to the tune of USD 610 billion an increase of more than USD 200 billion than the previous year.

So much for the economy of Hindu Atmanirbharata.

This chronic import dependence has resulted in depreciation of the Rupee against the Dollar since Indian Independence which has become unmanageable after the neoliberal reforms initiated in 1991, where administered exchange rate regime was changed to partial convertibility of rupee rate and later to full convertibility.

Thus, while at the time of independence the exchange rate of rupee against the dollar was Rs. 4.70, it slowly raised to Rs. 17 at the beginning of corporate capital reforms in 1991. After the exchange rate liberalisation was implemented, the exchange rate rose to Rs. 43 in 2000 and to around Rs 55 before 2014.

One of the electoral planks of Modi and BJP was that during the UPA regime the value of rupee and hence the dignity of the nation was depreciated. It was caused not because of any economic compulsions but due to political mismanagement and corruption of the Congress party

The present state president of BJP in Karnataka, Mr. Nalin Kumar Kateel, even went to an extent of publicly claiming that if Modi comes to power, with in a span of two years, Indian economy will  become so strong that instead of an exchange rate of Rs 60 to a dollar, an exchange rate of USD 15 for a rupee will be realised!

Any way… no magic happened. Rather economy declined further, import dependence multiplied and hence historic decline of Rupee to Rs. 77.60 against dollar. Thus, the decline of rupee will make imports costlier which in turn would lead to higher prices and inflation.

Political risk and capital flight            

Another reason for the depreciation of the rupee and hence inflation is capital flight of foreign investors from the Indian stock market. It is said that after the “second coming” of Modi, more than 22 billion dollars of foreign institutional investment has been withdrawn due to the increasing political risk to their investment due to growing polarisation and violence in the country. After the war broke out the sentiment of uncertainty made the foreign investors pull out of Indian market further.

While these are the inherent reasons for the increasing inflation, there are also additional and immediate reasons like the Russia- Ukraine war. The war has poured salt to the wound of Indian  inflation.

Due to the war induced geo-economic situation, the international crude oil prices are increasing. On the other hand, Indonesia has declared ban on its edible oil exports and likewise Malaysia. India imports 60% of its edible oil from Indonesia, Malaysia and Ukraine. All these factors have increased the prices of food items so, says the Modi government to paint a helpless picture.

But the prices of both petroleum products and edible oil in India is exorbitantly high not only because of increase in its international prices but majorly because of excise duties and the cess imposed, primarily, by the Central government and state governments. 50 to 60 of prices of the petroleum products are taxes and cess and 40 to 50 of price of imported edible oils are import duties.

Modi Made Inflation

Thus, the inflation in India is:

1) Imported- excessive dependence on Imports, aggravated during Modi regime but has its roots in the neoliberal policies for which previous governments are also responsible.

2) Modi Made-

a) Because the prices of imported goods are artificially exorbitant due to Modi taxes

b) The capital flight of investors resulting in decline of rupee and costlier imports due to Modis politics of Hindu majoritarianism.

Hence the moot question is whether these politico-economic factors causing inflation be mitigated by narrow financial instruments available to RBI?

After the Financial amendment act of 2016, the primary objective of the RBI is to control inflation through monetary policies. That is by controlling money flow in the economy.

Myopic monetary instruments and Monstrous Political Economy

The monetary instruments available to RBI to control money flow are by controlling the interest rates through imposing flexible Repo rates and controlling money available for transactions to the banks by imposing flexible CRR – Cash Reserve Ratio.

When the economy is facing demand crunch, the RBI reduces Repo rate thereby effecting the interest rate on the loans there by encouraging spending and investing, which in turn is expected to stimulate demand. Likewise, the Cash ratio, the amount of cash per deposit each bank is expected to rest in RBI is also decreased so that more money is available with banks for transactions.

On the other hand, when the prices are increasing, RBI construes the reason behind it as the over supply of money in the economy. So, to suck back the extra money it increases the interest rates and the CRR so that money available for transactions are curtailed.

The underlying dogma of the central Banks like RBI, under neoliberalism, in controlling inflation is: the primary and sole reason for the inflation is over flow of the money in the economy.

This may be true in some circumstances where economy is over performing. But price rise also happens when there are supply side constraints., when cost of production is increasing due to mismanagement of the economy or chronic import dependence. The Interest rate increase or effecting the decrease of money flow in the economy would not result in inflation control in such circumstances because the root cause of inflation is entirely different.

Such myopic monetary policies may result in an economic disaster in countries where the real income and the demand in the economy is already hit badly and the growth is already declining. In such a situation policies like interest rate hikes may result in further decline of economic activities creating a situation of Stagflation and economic crisis also.

Indian economy is facing a situation similar to the second example. Indian economy needs more demand push, more money flow in the hands of MSMEs etc. The recent RBI measures in the name of curbing inflation by hiking the Repo rate from 4 to 4.4% and the CRR hike from 4 to 4.5% will lead to further demand crunch, further unemployment without decreasing the inflation. Because inflation  in India at present is mainly due to Petroleum and edible oil price hike, which is caused by the taxation policies of the Modi government and not due to overflow of money or excessive economic activities.

It is said that RBI has been suggesting the government to reduce the excise duties to tame the inflation but the Modi government is not heeding. Hence the RBI, in its extraordinary meeting resorted to repo rate and CRR hike.

Through this myopic monetary policy RBI might have satisfied the inflated ego of the prime minister, but these measures will deflate the living conditions of the broad masses of the people.

This might also satisfy the credit agencies who subscribe to neoliberal monetary policy of inflation control, price stability etc., serving the needs of finance capital. But these policies will only protect the billionaires of corporate finance, but result in total destabilisation of the lives of crores of people.

*Views expressed are the author’s own. The author is a Karnataka-based journalist and activist.



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