Friday, October 22, 2021

Has the RBI taken over the government?

"The Union Cabinet on Thursday hiked Dearness Allowance (DA) and Dearness Relief (DR) by 3% to 31% to benefit 47.14 lakh (4.714 million) central government employees and 68.62 lakh (6.862 million) pensioners," The Wire. "This decision to hike the allowance will put an annual burden of Rs 9,488 crore (Rs 94.88 billion) on the exchequer. Earlier in July, the government had restored the Dearness Allowance (DA) and Dearness Relief (DR) and increased the rate of allowance from 17% to 28%." In one fell swoop, as it were. Dearness Allowance is given to government employees to cushion them from rise in prices or inflation. But, "India's retail inflation fell to a five-month low of 4.35% in September from 5.3% in August, as food prices softened, official data showed," ET. "Food inflation eased to 0.68% from 3.11% in August." The RBI has hung on to an interest rate of 4% since May 2020 despite a higher rate of inflation, HT. Since banks calculate interest on fixed deposits based on the rate set by the RBI, savers, especially senior citizens, are receiving negative returns on their fixed deposits in banks, moneylife. While government employees are getting a handout of 31% of basic pay to compensate for inflation. Not just that. When DA reaches to more than 50% of basic pay it is merged with the salary and then DA is calculated on the new pay, wikipedia. DA was 0 in January 1996, in January 2006 and again in January 2016, which was most probably because of merger with basic pay. As if to rub salt into our wounds, Governor of RBI Shaktikanta Das taunted, "The Reserve Bank of India (RBI) remains laser-focused to bring back retail inflation to four percent over a period of time in a non-disruptive manner," NDTV. "The assessment of inflation has been happily overtaken by actual outcomes in the form of a decline in food inflation. Formation of inflation is being buffeted by repeated shocks that have taken fuel inflation to an all-time high and turned core inflation persistent, with risks to the upside," said Deputy Governor Michael Patra. "Petrol and diesel prices were hiked for the fourth straight day on Saturday," ET. "Petrol and diesel in Delhi are now priced at Rs 107.24 per litre and Rs 95.97 per litre respectively," "Domestic petrol prices are up 32% in a year and 46% in two years while diesel prices are up 35% in a year, and 45% in two years." Since fruits and vegetables are transported from farms to markets by trucks, which run on diesel, it is astonishing that vegetable prices are dropping while the cost of transport is going up exponentially. Either farmers or transporters, or both, must be suffering enormous losses. "When the inflation target was accepted, it was assumed that the Monetary Policy Committee of the RBI, with three external members, would set policy rates and that is all there is to monetary policy," ET. But, "The RBI has expanded the list of tools in its armoury to influence interest rates, the exchange rate, liquidity in general and liquidity targeted at specific segments of end-borrowers to be mediated by different financial intermediaries and to prevent the differential between short- and medium-term rates from widening too much." If the RBI can inflict severe repression on citizens according to the price of potatoes, what is the government doing? Frying pakodas?  

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