Inflation and Interest Rates in India: The Impact of Covid-19


Aman Jha

Aman Jha is a 2nd-year Business Economics student at Aryabhatta College (University of Delhi). He is highly motivated towards Finance and likes to read about the same alongside geopolitics, behavioral economics. In his free time, he watches movies and series and analyzes them as he also wants to become a part time movie critic someday.

18th February 2022


With inflation at an all-time high, the topic is on everyone’s minds, from policymakers to shoppers. The worry is especially acute as inflation appears to be rising still; the Consumer Price Index (CPI) rose to a five-month high of 5.59 in the month of December 2021 and is expected to increase further in this year. Alongside inflation, another thing that concerns investors and central banks is the very low-interest rates and how this propels both growth and inflation in the economy. This is particularly of interest in emerging economies like India, where the Reserve Bank of India has to balance supply for the population alongside liquidity to markets whilst responding to unexpected fluctuations, including the presence of Omicron.


Inflation is the rate of increase in price and services over a given period of time, thus measuring the overall cost of living in a country or the overall increase in price. In order to calculate inflation, governments around the world make a basket of commonly consumed goods and track the cost of purchasing this basket over time. The cost of this basket at a given time expressed relative to a base year is the consumer price index (CPI), and the percentage change in the CPI over a certain period is consumer price inflation, the most widely used measure of inflation (Salwati, 2021). 


On the other hand, interest rates are the rate at which the Central Banks (FED in the USA, RBI in India, etc) lend to the commercial banks. This is the rate that the central banks use in order to control inflation and keep the economy liquid so that assets can be easily converted to cash. There is not a very well-established relationship between these two but generally, there is an inverse relationship between inflation and interest rates. So when the interest rates rise, inflation will decrease in the long run and vice versa.


On the evening of March 24, 2020, the government of India imposed a nationwide lockdown due to the Covid-19 outbreak. At the time, it was introduced as a short lockdown however the impact on our everyday lives is still felt in 2022. With everything from production facilities to export shut down and the demand continuing as usual, it was hard for markets to survive. Central banks worldwide decided to decrease the interest rate (the rate was almost zero in the US and Europe) leading to a market frenzy as most of the renowned indexes were breaking records. India was leading the way with the major Index BSE SENSEX surpassing 60000 points (in the month of October 2021) and NIFTY 50 crossing the 17000 points mark (in the month of October 2021). In a normal scenario prior to lockdown, they were trading at around 40000 and 12500 points respectively.


As interest rates were almost zero in most advanced economies, many emerging countries, such as Brazil and Mexico, were flooded with money as investors were able to earn more interest in these areas than in advanced economies. With so much money chasing a limited amount of goods, this led to a rise in inflation in all categories including Food Inflation, CPI, and WPI. The poor were the hardest hit by this, and as many as 230 million individuals fell below the national minimum wage poverty line in India (according to a report prepared by the Center for Sustainable Employment at Azim Premji University (APU)). 


Consumer Price Index in IndiaFig1 – inflation was at a peak during the 1st COVID-19 Outbreak in March 2020, and during the 2nd Outbreak in March mid-April 2021 (CEIC Data)


Inflation is often called a double-edged sword because, in an inflation-paced economy, the GDP growth is high as is the income of individuals. With the presence of Covid, the situation was unique as the GDP of India was shrinking with negative growth rates and the unemployment rate was rising because of the lockdown (as shown in the table below). With the closure of common facilities, many people were laid off. This motivated the RBI to stop decreasing the interest rate as it might fuel inflation out of control, making the condition even harder for the general public. (Dhingra, 2021) 

GDP and unemployment rate in India between 2019 and 2020

Fig 2 – GDP and unemployment rate in India between 2019 and 2020


The RBI and the government of India ensured that the market was adequately liquid enough to increase demand and revive the slowing economy. However, with most people saving their money in banks, the situation worsened as not only were individuals getting negative real interest on their deposits (because the interest rate earned on bank deposits was less than the inflation rate) but they needed to spend more on the same goods that they used to buy under regular circumstances. The situation was further exacerbated when a recent study found that people are taking more loans just to pay off their bills and to survive  (The Wire, 2021). On the other hand, the financial markets, which some economists believe are a true indicator of an economy, were climbing rapidly with cheap money and a huge inflow of foreign capital. This not only prompted a market frenzy but served to make wealthy people richer. With a GDP per capita of less than Rs 100,000 (approximately $1,300), the wealthy families were spending Rs 1,000,000 (approximately $13,000) on private jets just to flee the country during the second covid wave in 2021 (Business Today, 2021). Meanwhile, normal families were struggling just to get better healthcare.


With inflation currently still at its peak, with a belief that it will potentially increase due to supply chain disruption worldwide alongside an increasing demand for goods, the FED is in a discussion about when to increase the interest rates and the Bank of England increased the interest rates for the first time in almost 3 years in December 2021 (Bank of England, 2021). This means that the market will be less liquid to help control inflation in advanced economies. In India, the RBI will also follow the developed countries in increasing the interest rates sooner rather than later. There are talks about raising interest rates in the second quarter of 2022. But with the latest outbreak of omicron, the virus has once again forced some states and cities to put restrictions on lifestyles, and the medium to long-term impact on the economy is uncertain. It would be too early to predict when inflation will fall for certain as we now know from previous experience that lockdown and restrictions can be devastating for an economy and its people. The RBI has a delicate situation in providing for the citizens of India whilst keeping the markets liquid over the coming year.  




(1)  Salwati, 2021. How does the government measure Inflation [online]. Available at <>

(2) Dhingra, Ghatak, 2021. The Pandemic in data: How Covid-19 has devastated India’s economy [online]. Available at <>

(3) Misra, 2020. Explained: How are inflation rate and interest rate linked? [online]. Available at < >

(4) Pine II, 2022. Inflation and the ‘Experience Economy’ [online]. Available at < >

(5)  The Wire, 2021. Additional 230 Million Indians Fell Below Poverty Line Due to the Pandemic: Study [online]. Available at < >

(6)  Business Today, 2021. COVID-19 crisis in India: Wealthy Indians Escape country by private jets as infections spiral [online]. Avaliable at <

(7)  RBI, 2021. Monetary Policy Statement [online]. Available at < >

(8) Bank of England, 2021. Bank Rate increased to 0.25% – December 2021 [online]. Available at <>


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