Site icon News Bit

Waiting till June meant losing time when war related inflation pressures accentuated: RBI governor Shaktikanta Das

Waiting till June meant losing time when war related inflation pressures accentuated: RBI governor Shaktikanta Das
Even as the recent sharp surge in inflation is due to supply side factors, mostly war related that are beyond central bank’s control, the Reserve Bank’s MPC still chose to raise policy rates by 40 bps to 4.4 per cent in early May outside of schedule as a rate action was crucial to manage inflation expectations as inflation is getting more generalised, the latest MPC minutes indicate.

The MPC unanimously chose price stability over growth as it sees India’s macroeconomic fundamentals intact barring food and fuel inflation. Inflation risks have accentuated since the MPC’s April statement and the growth concerns have receded.

Improving contact-intensive services amidst revival in urban demand is driving personal consumption. The outlook for agriculture remains positive in the wake of normal southwest monsoon forecast for 2022, which would support rural consumption.

“The rebound in domestic economic activity is gradually getting generalised” said governor Shaktikanta Das in his minutes released on Wednesday. “The worsening outlook of inflation warrants timely action to forestall second round effects which could lead to unanchoring of inflation expectations. Heightened uncertainty and volatile financial markets could also add to such unhinging of expectations. Accordingly, decisive and measured monetary policy response is necessary to avoid any unintended shocks to the economy”

A higher inflation print also adds to the risk of negative real rate. “In view of a reasonable recovery and the sharp rise in inflation, frontloading of rate hikes is required to prevent the real rate becoming too negative” said Ashima Goyal, professor at Indira Gandhi Institute of Development Research. “Among risks from negative real interest rates include households buying gold thus aggravating the current account deficit and hurting financial intermediation”.

Justifying the timing of RBI’s rate action, the governor said that the war in Europe is now expected to last much longer than earlier anticipated. The April inflation was expected to be further elevated which came at a eight year high of 7.79 percent, way above the target band of 2-6 percent.” Hence it was necessary to act through an off-cycle policy meeting. Waiting for one month till the June MPC would mean losing that much time while war related inflationary pressures accentuated. Further, it may necessitate a much stronger action in the June MPC which is avoidable”

External member Jayanth Varma, professor at IIM, Ahmedabad, hinted at sharper rate hikes soon saying that there is a lot of catching up to do as the MPC prioritised economic recovery at the height of the pandemic until early 2021. and delayed normalisation. ” It appears to me that more than 100 basis points of rate increases needs to be carried out very soon” Varma said.

The configurations that exist today – hardening US yields; ever strengthening US dollar; equity sell-offs; emerging currency depreciations and capital outflows; rising debt distress – are reminiscent of 1993-1994 after which followed a cascade of emerging market crises. “At least, all the symptoms of a generalised financial deleveraging are in place” said deputy governor MD Patra.

For all the latest Business News Click Here 

 For the latest news and updates, follow us on Google News

Read original article here

Denial of responsibility! NewsBit.us is an automatic aggregator around the global media. All the content are available free on Internet. We have just arranged it in one platform for educational purpose only. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials on our website, please contact us by email – abuse@newsbit.us. The content will be deleted within 24 hours.
Exit mobile version