The Governor of the Reserve Bank of India (RBI) announced a 50bps hike in the repo rate after the Monetary Policy Committee (MPC) meeting on August 5. There was not much uproar over this; Markets unexpectedly closed flat. The quantum of the rate hike was within the expected range, and finally, the RBI appears to be doing what is expected of it: fighting inflation by increasing the policy rate.
This is especially a relief as it took some time for the RBI to acknowledge that inflation was above the comfort level. An emergency meeting of the MPC was held in May 2022 to begin the cycle of interest rate hikes. Before that meeting, arguments were being made that raising the rate could jeopardize the economy’s post-pandemic recovery. This thinking was evident in the minutes of the MPC meeting held in April 2022. Somewhat oddly, even after recognizing that many conditions in the global economy “… confer massive upside risks to the inflation trajectory and downside risks to domestic growth,” it went on to say that ” In view of the increasing risks and uncertainties, the MPC has decided to keep the policy repo rate unchanged at 4 per cent.
This argument did not hold much water for two reasons. One, the high level of liquidity in the economy did not ignite the fire for private investment. Second, if the RBI is not seen eager to play its mandated role of keeping the inflation rate around 4 per cent, it will cause uncertainty in the economy, perhaps putting the economy at greater risk. Thus, this time it was a welcome change to read the Governor’s statement, where he said “…the MPC stressed that sustained high inflation could destabilize inflation expectations and hurt growth in the medium term.” can deliver.”
Another argument that was being put forward earlier is that we are doing better than other countries, especially the US. It’s really outspoken. There is no doubt that inflation is a global phenomenon right now, and many global factors are at play. It is also true that India’s inflation rate for change is lower than that of the US. However, this does not mean that monetary policy in India can be lax. It is wrong to use the US as a reference in this case. It has a unique position in the world where its currency is viewed as a safe asset. This is manifested in the fact that even though the US is experiencing one of the highest inflation rates among developed countries, the US dollar is appreciating against a wide range of currencies. Furthermore, there is an asymmetry in how US monetary policy affects India, and hence monetary policy in India must take this into account.
This is true not only for India, but also for a large number of developed and emerging countries. For example, the Swiss National Bank was also forced to increase the interest rate by 50 bps in June, surprising the market, despite inflation being around 3.3 percent that month—much lower than the global comparison, though. Percentage for that country over the target 2%.
Japan, still facing very low inflation, is one of the holdouts and has resulted in the Japanese yen depreciating by more than 16 percent between March and July to its lowest level in more than two decades.
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The emergency meeting of the MPC, held between May 2 and May 4, just before the scheduled meeting of the US Federal Open Market Committee, FOMC, indicates that the RBI recognizes this position. “For emerging market economies (EMEs), these risks are amplified as they are exposed to domestic growth-inflation trade-offs and the most synchronized tightening of monetary policy around the world,” said the governor’s statement after the rate hike last week. Spillover from both faces,” thus, clarifying that global monetary policy has played a role in this latest increase by the MPC.
While initially the RBI may have been reluctant to struggle to keep the inflation rate close to the mandated target rate of 4 per cent, it appears to have let go of that position and is now focused on bringing down the inflation rate. doing. This is what is expected of the central bank and this is good for the Indian economy. This will go a long way in improving the reputation of the RBI, which is a vital component in fighting inflation. The battle for inflation is not won yet. Hopefully RBI will continue on this path.
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