The rate hike was needed to prevent inflation expectations from hindering growth.
The rate hike was needed to prevent inflation expectations from hindering growth.
RBI’s Monetary Policy Committee on Friday Benchmark interest rate hiked For the third straight meeting, policymakers battle to rein in inflation that has remained consistently ‘at or above’ the upper tolerance limit set for six months. The increase of 50 basis points takes the policy repo rate to 5.4%, and, more significantly, to the level seen in the pre-pandemic second quarter of FY19-20, when there was a slowdown in growth and around 3.2%. guaranteed retail inflation. rate cut. As MPC’s Jayant Verma pointed out in June, when the MPC recommended a hike of 50 basis points, the impact of the overall increase of 90 basis points from May still lags the real policy rate by 100 basis points from the RBI. has left. In the retail inflation estimate for the year – from 5.7% to 6.7%. Now only the cumulative increase totals 140 basis points, and puts the central bank slightly ahead of the curve. Yet, as Governor Shaktikanta Das acknowledged, consumer price inflation, even though far from its eight-year high in April, remains “uncomfortably high” with inflationary pressures being broadened. And with the MPC’s own forecasts for the second and third quarters, retail price gains above the upper tolerance mark of 6%, respectively, at 7.1% and 6.4%, leaving the rate setting panel very close to continuing the withdrawal of monetary accommodation. There was little choice. To prevent inflation expectations from becoming sluggish and from stifling growth by reducing consumption.
From an external sector and exchange rate perspective also, the growth of globalized inflation is leading to policy tightening in advanced economies which in turn is weakening money markets which includes weakening the rupee and adding inflation to the mix. Is. Noting that ‘persistent shocks to the global economy’ prompted multilateral institutions, including the IMF, to lower their global growth projections and ‘expose growing risks of recession’, Mr Das remarked, “disappointingly”. The globalization of inflation is coinciding with the disruption of trade.” Russia’s invasion of Ukraine and the resulting effect on trade flows from the conflict zone have stretched the supply chain for many commodities and under price pressures for a range of commodities. is added. The latest geopolitical tensions in East Asia triggered by US House Speaker Nancy Pelosi’s visit to Taiwan in the wake of dire warnings from Beijing, and China’s decision to respond with aggressive military exercises around one of the world’s busiest shipping lanes may affect global trade. The times when uncertainty and risk aversion are already high. Despite Mr Das’s belief in the ‘flexibility’ of the fundamentals of the economy, it is perhaps appropriate for the MPC to heed Mr Verma’s exhortation by ‘providing projections of the policy rate’s future path’. This will help anchor price gain expectations and will certainly enhance the inflation-fighting credibility of the RBI.