Current Affairs India: ExplainSpeaking | The curious case of monetary policy’s impact on inequality

Monday, 3 April 2023

ExplainSpeaking | The curious case of monetary policy’s impact on inequality

The Reserve Bank of India is expected to raise the repo rate by 25 basis points this week. But just like the past two repo rate hikes, this decision is unlikely to be unanimous; more importantly, it will likely be widely debated for soundness. That’s because many believe that any further rate hikes will result in crimping India’s economic growth and worsening unemployment.

The standard textbook answer to this criticism is: A central bank does this not so much to address the actual inflation but to prevent the so-called “second-order effects” of high inflation.

The trouble is, and this is one of the relatively ignored aspects of monetary policy, that inflation control by this method relies heavily on denying the common people, who are most affected by high prices, the chance to raise their wages in line with the already high prices of the first round.