*****Arming to change inflation projection – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/arming-to-change-inflation-projection/articleshow/91324656.cms

Synopsis

The MPC has retained its accommodative stance with India that will be caught in a global slowdown.

RBI’s Monetary Policy Committee (MPC) has stepped outside its calendar to hike the policy repo rate by 0.4 percentage points to 4.4%, reversing the second leg of its cut in interest rates in 2020. The hike was expected since the MPC‘s April review, when RBI had introduced the standing deposit facility as the new floor for the liquidity adjustment corridor that was 40 basis points (bps) higher than the reverse repo rate and restored the policy band to its pre-pandemic 50 bps. RBI has, since last year, been drawing out liquidity from the system through variable reverse-repo auctions where the cut-offs were approaching the 4% repo rate. Gilt yields have been rising in anticipation of the rate hike. Banks are also ahead of RBI in passing on higher borrowing costs.

The element of surprise that roiled bond and equity markets was the timing of Shaktikanta Das‘ announcement. The markets were gearing up this week for steep rate hike and balance sheet reduction announcements by central banks led by the US Federal Reserve, and had not factored RBI jumping into the fray. RBI’s position on inflation has altered significantly since its policy review in February, when it considered price pressures in India as considerably different from those working the West. The MPC now sees India importing higher fuel and food prices, threatening to raise the trajectory expected a month ago. Re-anchoring inflationary expectations, after a spurt in March followed by an expected rise in April, is now key to stabilising the economy.

The MPC has retained its accommodative stance with India that will be caught in a global slowdown. Alongside deciding to raise the cash reserve ratio (CRR) by 50 bps, Das again confirmed RBI support to revive consumption and investment demand.

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