Analysis: RBI’s repo rate at pre-coronavirus level; But inflation is tough! | analysis RBI raises repo rate again by 50 bps print exp scsg 91

-Sachin Rohekar

Although such a decision is expected to come from the three-day meeting of the Reserve Bank’s rate-setting committee or ‘MPC’ on Friday, it has turned out to be at the upper end of the expected range of 35 to 50 basis points. Of course, RBI Governor Shaktikanta Das also supported the increase in the interest rate for the third time in a row, saying that ‘half a percent repo rate increase is normal in today’s global environment.’ The third increase in the repo rate this year since May, which makes borrowing more expensive by banks, now stands at 5.40 percent. It means that it has gone beyond the pre-coronavirus level of 5.15 percent and is the highest level since August 2019. What are the exact signals given by this MPC meeting?

What is the rationale of the Reserve Bank for increasing the repo rate by half a percent?

Of course, Governor Shaktikanta Das explained that the decision to increase the interest rates was taken unanimously by the Rate Setting Committee (MPC) in this meeting for the same reason that the interest rates are being increased aggressively by central banks everywhere globally, i.e. to control inflation. However, in a press conference, he made open comments about increasing the price by half a percent again. Interest rate hikes by central banks around the world are happening more than this, i.e. one percent, one and a half percent. Compared to that, a half percent hike is ‘normal’. On Thursday, Governor Das also referred to the Bank of England’s first rate hike of half a percent since 1995.

No change in inflation forecast, but tone upbeat…

At the end of the meeting, the Reserve Bank also maintained that the inflation rate based on the consumer price index will remain above the satisfactory level of six per cent for the third quarter of the current year i.e. till the end of December 2020. While in the fourth quarter from January to March 2023, it will see a decline to 5.8 percent, it is her guess. However, prices of many commodities imported from India have moderated in the intervening period. In its inflation forecast, the central bank has assumed that crude oil prices will average $105 per barrel. In fact, it was at $100 and below for the last month and on Thursday it was at $94 per pipe. Moreover, Governor Das pointed out that the desired effects of the measures planned by the government as well as the Reserve Bank to control inflation are also gradually visible. Therefore, he also indicated that the speculation regarding the inflation rate may change in the future. However, he also admitted that since the factors affecting the prices of domestic goods and services are external and this inflation is ‘imported’, the scope of control over it is also limited.

Reserve Bank maintains economic growth forecast…

Most global credit rating agencies and reputed organizations like the International Monetary Fund (IMF) have recently downgraded India’s growth forecasts for the current and upcoming fiscal years. However, the Reserve Bank of India has maintained its forecast of 7.2 percent growth in the current year 2022-23. As well as the full-year growth forecast, the RBI has also maintained quarterly forecasts. Accordingly, it has projected ‘GDP’ growth of 16.2 per cent in the April-June quarter, 6.2 per cent in July-September, 4.1 per cent in October-December and 4.0 per cent in January-March 2023. After that, the ‘GDP’ growth will go up to 6.7 per cent in the first quarter of the new financial year 2023-24, the governor said.

What will be the RBI’s stance from now on?

Rising commodity prices and a weak rupee top the list of external risks pointed out by the Reserve Bank. Economists are of the opinion that due to rising global interest rates, the interest rate gap between emerging markets like India and major economies is also decreasing, so that it does not decrease further, the Reserve Bank will inevitably have to increase the interest rate. Because if it doesn’t, the dollar, pound investment and capital invested in the country will take the exit route. Foreign investors have withdrawn $26.83 billion from the Indian market this year since April. The continuous decline in the rupee, which has tumbled around seven percent this year, is also putting pressure on the MPC. Therefore, it would be premature to say that the current cycle of price hikes is over or will end soon in response to the question of what next. A way out may appear if inflationary eclipses on the global economy are avoided and the direction of the Russian war in Ukraine and similar new crises in the form of Sino-Taiwan do not arise.

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