RBI as a Controller of Inflation

Inflation has been a daunting issue for India since independence. Its harmful effects have been observed for various reasons, as for example, in the year 1974, the inflation rate was 28.6 % and the reason associated with it was the rise in oil prices (world’s oil crisis when OPEC reduced production and increased oil prices). In addition, the ‘70s were the years of war and drought, resulting in stagnation of the growth of the Indian economy and a rise in prices of various commodities. The financial crisis of 1991, due to government fiscal deficits, rupee devaluation resulted in an uptick of inflation of 13.87% – taking a toll on the economy. Even though inflation was much controlled at a later date, but till the end of 19th century average inflation of 9.3% was recorded. In the society, the poor are the most vulnerable to inflation. Inflationary pressures faced by India was severe in 2006-08 and 2009-11, causing an immense burden on the purchasing power of ordinary Indian citizen.   To begin with, we shall first understand the concept of Inflation.

What is Inflation?

Inflation is defined as the significant and sustained rise in the general price level of most goods and services of daily or common use, such as food, housing, clothing, transport, consumer staple, etc. Inflation indicates consumers’ purchasing power of a unit of a country’s currency, leading to a slowdown in economic growth. The valuation of money is reduced in inflation, meaning, that a certain amount of money now would be able to procure a smaller quantity of a commodity than it did prior to inflation. The general cost of living of ordinary people is impacted with such a loss of purchasing power. In a basket of goods and services, change in average price over time is measured by inflation.

How to Measure Inflation?

The whole economy can be ruined when inflation is not kept in check. There have been economies that got shattered due to high inflation rates. Inflation can be measured at three levels and, usually prices increase at each level till the goods are finally reached to the end-users.

More information on Consumer Price Index (CPI)

Consumers purchase various commodities from the retail shops directly and, hence, price increase or inflation experienced at retail stores will be reflecting the rise in prices all over the country. Such an index showing inflation at retail is known as CPI. Various socio-economic groups are covered by CPI and the four indices are CPI for Industrial Workers (CPI-IW), CPI for Agricultural Laborers (CPI-AL), CPI for Rural Laborers (CPI-RL) and CPI for Urban Non-Manual Employees (CPI-UNME). In addition, a new series on base 2012=100 is being used by CPI for the whole of India and its states and UTs separately for urban, rural and combined.

 

• Headline Inflation – this means change in value of all commodities in the basket. Headline inflation is considered more relevant in developing countries.
• Core Inflation – Shows price rise in goods and services excluding the energy and food articles.

Types of Inflation

The various types of inflation on the basis of rising prices or inflation rates have been discussed below:

1. Creeping Inflation: This kind of inflation happens when the price rises gently. It has been considered as the mildest form of inflation, hence, also known as the Mild Inflation or Low Inflation.
2. Chronic Inflation: When the Mild/Creeping Inflation continues to increase for a longer period of time, it leads to Secular or Chronic Inflation. This kind of inflation can either be continuous, meaning, consistent without reduction, or, Intermittent, meaning, occurring at regular intervals. This inflation, without any downturn leads to a more serious form of inflation known as Hyperinflation.
3. Walking Inflation: An increase in price rate which is more than the creeping inflation leads to a Walking Inflation. This type of inflation basically gives a cautionary signal that running inflation might occur soon. Furthermore, if such an inflation is not taken care of or checked at an appropriate time, it can eventually lead to Galloping Inflation.
4. Moderate Inflation: When the concept of creeping and walking inflation are combined together, it is known as Moderate Inflation.
5. Running Inflation: When the rate of price rise experiences rapid acceleration, it results in Running Inflation. Price rise beyond 10% and below 20% per annum may be called as the Running Inflation.
6. Galloping Inflation: Double- or triple-digit price rise situation is known as Galloping Inflation. It is also known as the Jumping Inflation.
7. Hyperinflation: When the price rise is extremely high and fast, having difficulty even in measuring its magnitude, such inflation is referred to as Hyperinflation.
8. Stagflation: When the price of commodities increase along with a fall in growth and employment is known as stagflation.

Types of Causes of Inflation

Varieties of reasons are responsible for the occurrence of price which are explained below:

1. Demand-Pull Inflation – Increase in Aggregate Demand, mainly from either increase in Expansionary Fiscal Policy or Government Expenditure or increment in household and firm expenditure, leads to Demand-pull Inflation. When the firms in the economy become incapable of producing goods and services demanded by households, Aggregate Demand becomes greater than the Aggregate Supply in the given time period. This is the root cause of such an inflation. Increase of demand when there are shortages of supply fuels such inflation. It can also be viewed as a situation as, creation of extra money either by public borrowing or printing – too much money chasing very little output.

When the aggregate demand in an economy increases the aggregate supply at the full employment level a situation of Inflationary gap arises.

If in an economy, all the available resources are fully utilized and no scope of further improvement exists in the economy, such a situation is termed as Full Employment. Such an economic situation basically represents that the economy is operating at its maximum potential – product prices in an economy being stable, the unemployment level is low, production of firms being sold, resources are fully utilized, no shortages exist in the economy.

2. Cost-Push Effect – A situation may arise where inflation is caused by an increase in producing goods and services. The increased price of factors of production, ultimately leads to high prices of final goods and services offered to the consumers for procurement. Such a situation is known as cost-push inflation. Cost push inflation can be due to three factors:

• Increase in wages / wage push inflation – increment in wages of employees, considering them not justifiable on aspects of either increase in the cost of living or employee productivity – leading to increased Cost of Production and hence, Cost-Push Inflation.
• Increase in profit of the firms / Profit push inflation –Decisions taken by firms to increase their profit margins, whereby, they charge higher product prices. This increases prices upward and results in Profit Push Inflation. Such a situation generally arises when very few producers for the particular good exist in the entire market.
• Increase in raw material prices / Raw Material push Inflation –Such a situation arises due to increased Raw material prices. It can also be said a situation of supply shock inflation. A supply shock is considered to be an unexpected event which changes the supply of a particular product or a commodity and hence, results in an unforeseen price change. If we assume, Aggregate Demand for a commodity is not changed, product prices will increase with a decrease in supply or a supply shock situation – also known as Adverse Supply Shock Inflation.

During the year 1970s, the price rise of crude oil was decided by the OPEC countries, which had been like a supply shock for the entire World economy – resulting in price rise of petroleum products and fueling inflation.

India, has been facing typical issue of bottleneck inflation (i.e., structural inflation) – a situation arising due to shortfall of supply which is considered to be a general crisis of developing economies (lack of investible capital to produce the level of commodities actually required) and rising demand.

BOTTLENECK INFLATION – A situation when supply falls drastically whereas, demand remains same. 

3. Exchange Rates – With the passage of time as the world is becoming advanced, globalized and interconnected to one another, fluctuations in exchange rates between the currencies of two countries affect prices of commodities – thereafter, inflation. For example – we take two currencies, i.e., US Dollar and Indian Rupee – their values with respect to each other are constantly changing as currencies are dynamic in nature. Considering a situation, where the INR falls against US$ leading to a situation where American imports are expensive for India. Devaluation of the Indian Rupee means that the importers will have to pay more for the same quantity or type of commodity they are importing from America. As a result, the sale prices are increased, passing the increased cost burden to the final consumers – thereby, increasing Inflation in the economy.

Also, with fall in value of INR, Indian Exports have become more competitive to the USA. Since, Indian exporters earn in USD (more valuable now), profits of exporters increase.

4. National Debts – Increasing debt (deficit) of a country, can make the government raise taxes or print money to pay it off. When the taxes are increased, business units would be shifting their increased burden of corporate taxes to the consumers by increasing prices of commodities – leading to inflation.
5. Money Supply – Inflation is likely to be caused if money supply is increased faster than the growth in an economy. This is because more money will now be available for the same number of goods and services. Hence, an increase in monetary demand leads to firms increasing commodity prices. The monetary authorities can increase the money supply by printing money. RBI prints currency and supplies money in the Indian economy. Ministry of Finance mints coins but are circulated in the whole nation by Reserve Bank of India.

Currency issued by RBI is considered to be a liability for both government and the central bank as well.  An equal amount of assets will be required to back such a liability. The assets include Gold Reserve and foreign exchange reserve.

Money supply in India has been done on the basis of Minimum Reserve System since 1956. During that time, RBI was empowered to issue currency to any extent – requiring holding gold reserve and foreign securities. Since 1957, in order to print any amount of currency in the economy, RBI needed ₹200 cr. to keep as securities (Gold Reserves = ₹115 cr. and Rupee securities = ₹85 cr.) 

Effects of Inflation

• An average person’s purchasing power is eroded by Inflation.
• The yields of the aviation industry are reduced due to an increase in basic crude oil prices – increase in the cost of fuel is directly resulting in higher ticket prices, route cancellations and decreased demand for airlines. Not only is the industry suffering but also the consumers opting for such services.
• There has been a reduction of people spending on pleasure trips or vacations in order to save and spend money only on necessities. Overall Hospitality industry suffers when people choose not to spend on restaurants and hotels unless necessary.

Similarly, necessary for this industry is land, food and wage rate, the prices of which are increased in such a situation – drastically affecting the functioning of the industry.

• Reduction in the real value of money and other monetary items is observed during inflation.
• If consumers begin hoarding goods expecting price levels to increase further in the future, shortages of commodities can be experienced.
• People who belong to fixed-income groups experience a decline in real income, whereas, some businessmen and entrepreneurs experience a rise in profits. Thereafter, income distribution inequality becomes acute.
• Inflation, when combined with other factors, have an impact on country’s export and import. High inflation would mean that goods and services would be expensive compared to other country – companies will be paying more on factors of production, final commodity price is likely to rise and the foreign buyers may not be interested to purchase at such a high price. Hence, exports will reduce.
  A rise in prices would mean that people would now be interested to import from other countries whose price for the same products is cheaper.
  In the long run, inflation rate change has an impact on the changes in exchange rates.
  Depreciation in exchange rates, causes inflation to increase – import expensive (1US$ = Rs. 70 becomes Rs.76/ US$)
  Appreciation in exchange rate reduces inflation – imports cheaper (1US$ = Rs. 70 become Rs. 67/US$).

Steps Taken by RBI to Combat Inflation

Inflation in India is a grave matter of concern, provided the existing disparity between the rich and the poor people, on the one hand, and on the other, between the Urban and the Rural population. The high prices paid by the consumers do not always reach the primary producers, but are enjoyed by the middlemen and speculators, given existing shortages in the economy. Thus, inflation is not an overnight phenomenon.

The Reserve Bank of India (RBI) was established on 1st April 1935 in accordance with the Reserve Bank of India Act, 1934. As the central bank of India, it has multiple functions, gradually evolving and gaining autonomy. In addition to the primary function of RBI, i.e., sole authority to issue banks notes of all denominations, its other functions are regulating the financial system, managing exchange rates and being banker of other bankers. It is the policymaker of the Monetary Policies in India, the policies of which was formally adopted in the year 1998.

To control inflation in India, there are various policies adopted by both RBI and the government, which are as follows:

The RBI controls the supply of money, usually, targeting an interest rate or inflation rate for ensuring price stability, and also, economic growth. Such macroeconomic policy of the central bank is known as the Monetary Policy. The Reserve Bank of India Act, 1934 was amended in May 2016, after which the Flexible Inflation Target was adopted. A flexible inflation-targeting mandate of 4% (+/-2) was adopted and as a key indicator headline, CPI was chosen. It helped in predictability, deciding monetary policy, and maintaining stability and transparency. It made RBI more accountable to the government in case of its failure to meet such inflation targets. We shall now discuss the tools of monetary policy.

• Cash Reserve Ratio (CRR): The percentage of time liabilities and net demands that banks must maintain as the cash balance with the RBI is known as CRR. Changes in such rates influence resource availability in the banking system, to be lent to the private sector, and the RBI pays no interest to the banks on such deposits. The current rate of CRR is 4%.
  In order to control inflation, CRR is increased by RBI – increasing of which means the commercial banks are required to maintain a higher cash balance with RBI. This reduces the bank’s ability to lend to the market, reducing the liquidity in the market. This increases the lending rates, thus, containing the inflation.
• Statutory Liquidity Ratio (SLR): The percentage of time liabilities and net demands that commercial banks must maintain in the form of liquid assets such as government securities, gold, etc. is known as SLR. The current rate of SLR is 18%.
  An increase of SLR by the RBI is a way to control inflation. An increase in SLR means banks are required to keep liquid assets with them more, and thus, lending to private firms decreases. Consequently, lending rates increases and the liquidity in the market reduces – thus, containing inflation.

LIQUIDITY ADJUSTMENT FACILITY – Such a tool is used by RBI to borrow money through repurchase agreement (REPO) or to make loans to RBI through Reverse Repo agreements.

• Repo Rate: When short-term loans are provided to the commercial banks by the RBI against collateral or any other approved government securities under LAF, it is known as REPO Rate. Such a step is taken by the RBI for controlling credit availability, inflation and economic growth. Current repo rate stands at 4%.
  During high inflation, RBI increases the repo rate. This is done to reduce the flow of money in the economy. Due to the rise in this rate, banks are discouraged from borrowing money from the central bank – decreasing the liquidity in the market. This also implies it is quite costly for the business firms and industries to borrow the money at such increased lending rates. As a result, investment slows down, and so is the money supply in the market. Thus, controlling inflation.
  In the case of deflation, the opposite steps are taken to what is taken during inflation.
• Reverse Repo Rate: The rate at which the RBI borrows money from the commercial banks when there is excess liquidity in the market, is known as the Reverse Repo Rate. The current rate is 3.35%. this mechanism is adopted to absorb excess liquidity in the market and thus, restricting the borrowing powers of investors. The banks receive interests on lending to the central bank.
  During high levels of inflation in the economy, RBI increases the Reverse Repo Rate – encouraging banks to park more of their funds with the RBI to earn high returns. The banks are left with lesser funds to lent it to the investors. It reduces the liquidity in the market and interest rate on borrowing is increased. Investment is decreased as private firms find it costly to borrow loans for their expansion activities.
• Marginal Standing Facility (MSF): MSF launched by the RBI in 2011-12 while monetary policy was being reformed. It is the rate at which commercial banks borrow short term loans from the RBI. As we have seen that in case of repo rate, banks borrow from RBI by pledging government securities. Now, for instance, for receiving funds, banks have pledged all of its securities over and above the SLR to the RBI, and now is in requirement of immediate funds. In such a case, banks can borrow from other banks and the inter-bank lending rate is higher and may also vary. This also means that, other banks can also charge whatever interest rate it feels like and hence, there occurs a situation of volatility. MSF was introduced for such cases. Under MSF, banks borrow funds from RBI with SLR limits by pledging government securities. Against the unanticipated liquidity shocks to the banking system, it acts as a safety valve.
  MSF is the last resort of borrowing by the commercial banks after it has exhausted its borrowing options including the repo rate.
  The MSF is kept at a rate higher than that of the repo rate, to discourage banks to borrow under such a facility.
  Current MSF rate is 4.25%.
  POLICY CORRIDOR – The area/ range between the lower limit of reverse repo rate and higher rate of MSF, is known as Monetary policy corridor. The repo rate remains in the middle. The value of the MSF and Reverse repo is tied with that of the repo rate – meaning, change in Repo rate will also change MSF and the reverse repo rate.
• Open Market Operations: Purchase and Sale of Government securities (G-SEC) in the open market by the RBI is known as Open Market Operations (OMO) – done with an objective to adjust the rupee liquidity conditions in the market. OMO is caried out by the RBI through commercial banks and dealing with the public is not done directly.
  When Inflation is high in the economy, excess money supply is taken out by the RBI by selling G-SEC. This means, G-SEC issued by the RBI is brought by the market and excess of money is sucked out of the market. As a result, the lending rate increases and borrowing by the private investors become costly. This is how inflation is contained.
• Market Stabilisation Scheme (MSS): This scheme was introduced by the RBI in 2004 to address the issue of excess liquidity in the market. Liquidity of a long-lasting nature in the market which arises from huge capital inflows is absorbed through sale of G-sec and treasury bills in MSS. The mobilized cash is held in a separate government account with the RBI. Similar to OMO, in MSS, the G-sec is sold in the market by the RBI to suck out excess liquidity in the economy. G-SEC is borrowed by the banks and money is provided to the RBI. As a result, a reduction of excess liquidity takes place in the economy. The lending rates increase and the private investors find it costly to borrow money. Hence, inflation gets contained in the economy.
  Since, MSS involves the selling of G-SEC in the market, this process is incapable to control deflation in the economy.

Current Situation of India – Covid-19 And Inflation

The deadly global pandemic COVID-19, has not only taken lives of lakhs of people but also affected the worldwide economy. The total lockdowns imposed in different countries to curb the deadly virus had brought economic activities to a standstill. After the pandemic hit India, the agricultural supply chain got disrupted due to the national lockdown imposed by the government. As a result, prices of essential food items have spiked and resulted in food inflation. This price rise affected the penurious most and put drastic pressure when employment and livelihood collapsed. The unemployed people and the ones who lost their jobs are unable to find new employment, and those who have jobs, several of them are working at very low wages – difficult for sustenance. Due to the pandemic, there has been significant poverty and hunger in India.

• Many self-employed Indians and people with small businesses have been negatively affected by the increase in fuel prices. The government’s decision to increase fuel taxes was considered to be a reason of higher inflation. India depends largely on crude oil imports. In the FY 2020-21, India’s overall imports on petroleum products were approximately 19.8%. The rise in international crude oil prices has fueled inflation. Logistic costs are also increased with retail prices of petroleum increasing. The burden of commodity price rise is shifted to the final consumers, as seen in higher prices of two-wheelers and passenger vehicles.

• Supply disruptions during the nationwide lockdown and Inflation in food items such as vegetables and edible oils, increased the CPI inflation. As per the world bank report, the annual inflation rate of most countries cooled down except India. Hence, it is being said that the inflation will pose a serious challenge for the central bank and policymakers.
  

• At present, the nature of “cost-push inflation” is the trend of higher inflation in India – inflation is pushed by cost and not demand.
• Indian retail inflation, after the second wave of Covid-19 pandemic, for July 2021 was 5.59% – easing after staying above 6% for two consecutive months in a row. This was due to improved commodity supplies after the pandemic restrictions were lifted. Inflation has increased in the year as the companies have shifted the burden of the rise in input costs (like steel, cement, fuel) to the consumers in the middle of the gradual demand rise.
• Core inflation (excluding food and fuel costs) was estimated to be between 5.94% and 6.1% in July compared to June (between 6.1% to 6.2%).
• Severe economic hardships have been brought by the pandemic, especially among the youth. The pandemic has put the huge Indian youth workforce at a high risk of long-term unemployment. Even after the recovery of the situation, there have been many young Indian workers who did not turn up for their work – rural migrant workers can be one such example, where they are reluctant to join their work in urban areas. It has been said that unemployment is inversely related to inflation. We can explain this with a small example – suppose the Aggregate Supply is constant and there has been an increase in the Aggregate Demand in the economy. With an increase in the demand in an economy, it is obvious that more production will be needed to meet the demands and hence, firms will hire more workers. As a result, GDP output increases and also the price level. This scenario can be described as Demand-pull Inflation. With more workers being hired, unemployment decreases. Also, an increase in the price level leads to inflation. Hence, we see a negative correlation between Inflation and unemployment. This is shown by a curve known as the Phillips Curve – representing the relationship between the rate of inflation and the unemployment rate. With economic growth comes inflation, leading to more jobs and less unemployment. Hence, there exists an inverse relationship between inflation and unemployment.
• STAGFLATION is a situation where there is slow or stagnant economic growth along with rising unemployment and high inflation. If suppose, the aggregate demand in an economy is constant and due to some unforeseen events, aggregate supply declines, then with aggregate supply declining, the real GDP output declines and an increase in unemployment takes place, along with increased price levels. This shift leads to a Cost-Push Inflation (this phenomenon could not be modelled by the Phillips curve). With the second-wave of COVID-19 pandemic, there has been a complete loss of livelihood for millions of households in India. There has been a drastic fall in household incomes. This will lead to a further decline in demand and the unemployment situation will further deteriorate. As discussed above, there has been a sharp rise in inflation – mainly due to the supply-side shocks, reduced profits of manufacturing and service business firms, and elevated expectations of inflation. Such a situation was building up from before the year 2020, where headline inflation remained high. The expected third-wave of COVID-19 pandemic may worsen the situation even further. Although, some experts are of the view that inflation in India is a temporary phenomenon, while some consider is to be a mix of transient and durable factors. Looking at the growth of Indian economy, some are of the opinion that slowdown might be observed and GDP growth is to remain below 6% for Q1 FY22, whereas, some said that the Indian economy will register a double-digit growth.

RBI and the Dilemma

The Monetary Policy Review, taking place every two months, talks about two key aspects. One, outlook on economic growth (GDP) and, two, outlook on retail inflation. It is legally mandatory for the RBI to keep the inflation rate between 2% to 6%, which means RBI has to ensure that the rate at which retail prices increase in the country neither falls below 2% nor increases beyond 6%. For GDP growth, there are no such mandatory requirements, but RBI has to respect the government’s decision and share concern in this matter. RBI tries its best to boost economic growth when the inflation rate is within desired limits. For boosting the economic growth, RBI reduces the Repo Rate – trying to make it convenient for the businessmen and other economic agents to seeks new loans, and hence, boost their economic activities.

RBI will not be able to boost the economy and curb inflation at the same time. Up till now, RBI has favored boosting GDP growth instead of curbing inflation as it hoped that high inflation in India is a temporary situation – COVID-19 had disrupted the supplies and when such supply chains recover, the rate of increase in prices will come down.

This chart is showing how the inflation is going beyond RBI’s target zone.

India’s growth was decreasing even before the onset of the corona virus pandemic and RBI was in the mode of reducing interest rate and boosting India’s GDP. In addition to this, it was thought that as and when the economy revives, RBI would be focusing upon the inflation. With the 2nd wave of COVID-19, RBI was taken back to the initial phase where again, India’s growth was disrupted as a result of the disruption in economic activities – forcing RBI to select one between curbing inflation and boosting the growth. During this phase, both the CPI and WPI spiked. RBI continues its decision to boost economy, but, also, understood that inflation would increase further.

Unable to increase the interest rates, the RBI has increased money supply in economy – increasing liquidity – hoping that it will enable borrowers (large or small business units) to raise funds – during such a time when the economy has been hit so badly and the revenues have declined. Nevertheless, excess liquidity also fuels inflation in the economy.

Commercial Banks – The banks have kept a large part of the fund with the RBI using the ‘Reverse Repo Rate’ – earning for banks. These funds were lying unused for two main reasons – one, banks have become quite risk-averse due to high NPA or bad loans or loans not being repaid. The banks did not want to extend loans to the borrowers as they were not sure about its repayment. Two, among businesses the credit demand has declined as they did not have a good reason for investment expansion due to low demand from the consumers. Most of the businesses are burdened with their unsold stocks.

The dilemma with the RBI was that whether it should raise repo rate to curb the inflation or should it keep it low to support economic growth of India. Nevertheless, again, reduction of interest rates was not an option due to high inflation rates for a long time. In addition to this, question of whether excess liquidity should be pulled out from the market, also came up. Furthermore, there were thoughts about changing from an accommodative stance to a neutral stance also.

Finally, 3 main things have been done by the RBI recently:

• Repo rate unchanged
• Via reverse repo rate, excess liquidity to be pulled out from the market
• Accommodative stance to be followed

As of 4th August, 2021, excess liquidity in the banking system was Rs. 8.5 Lakh Crore. With an objective to absorb excess liquidity in the economy, RBI has announced to conduct a Variable Rate Reverse Repo (VRRR) auction program. Pulling out money from the system affects the demand for assets.

Areas of Concern

1. We have seen a high retail inflation, and also, as forecasted by RBI is still likely to remain quite high in the coming quarters of next FY. India is suffering from the effects of corona virus pandemic, and has inflation even when its demands are low – inflation projection for the current fiscal year increased to 5.7%, which is an increase of 60 basis points. As and when situations normalize, demand is expected to rise and so is inflation.
2. It is highly expected that price levels are to increase further, as the consumers are of the view that inflation is not just a temporary phase (as claimed). Taking an instance – behavior of people likely to be affected as their demand for wages will increase (people believing that expenses in future will increase due to high inflation). Such demand will affect the pricing decision by the business firms, and such a high salary cost burden will shift to the final consumers – increasing the price level of commodities. Such inflation expectations should be curbed by the central bank.
3. Interest rates might be increased by the RBI in the near future, if inflation is not brought under control soon. Increase in interest rates would mean that people will be inclined to save more in the form of savings or FDs, and not spending much. A decline in demand would ultimately bring down the price levels. But on the other hand, business enterprises would be reluctant to borrow funds at such a high rate, and this will definitely have a negative impact on the country’s growth.

Conclusion

Some experts believe that high inflation can possibly come under the Monetary Policy Committee target band if vaccination coverage is faster, minimizing out-of-the-pocket health expenditures. Links have been made with Indian economic growth with the progress of vaccination, which is observed to be way lower than expected. Vaccination is being considered as the sole option to save millions of lives and also, save the economy from adverse effects of third-wave of COVID-19 pandemic. According to reports, it is said that to fully vaccinate the entire Indian population, per day 86.5 lakh doses of vaccination are required. The consumption-led strategy should be adopted now in the form of support to households, for the revival of the economy and also, to curb inflation. In addition to this, structural inflation existing in India should be kept in mind, and job creation should be focused upon. If the growth in the economy remains fragile with inflation and unemployment rates going up, there will be an urgent need for better policy formulations by RBI and the government to tackle the situation. Inflation, as already mentioned before, affects the poor people the worst, who depend mostly on the basic needs of food, clothing and shelter. Those with higher incomes often offset higher prices of commodities and services with higher income, and also, prices increase for basic necessary items than for luxury items.

Inflation is considered to be a necessary evil where one does not like it but is needed for economic growth. The steps taken by the authorities might have an impact on the inflation rates, but the efforts given to the economic growth should be stable and focused. A proper balance between both is the need of the hour.

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