*****RBI’s interest rate hike forefronts inflation as the big challenge in the months ahead–Times of India

lipped from: https://timesofindia.indiatimes.com/blogs/toi-editorials/rbis-interest-rate-hike-forefronts-inflation-as-the-big-challenge-in-the-months-ahead/

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A little over three week after their last meeting, RBI’s monetary policy committee held an off-cycle meeting and unanimously voted to increase its policy interest rate, repo rate, by 40 basis points from 4% to 4.4%. It’s the first repo increase since August 2018 and marks the definitive end of about three years of loose monetary policy which prioritised boosting economic growth over inflation.

The main messages from RBI governor Shaktikanta Das’ statement explaining these measures are that latent inflation risks are rapidly materialising. Moreover, it’s hard to get a clear picture of what lies ahead because we are in the midst of a very uncertain environment.
Most worrisome, is the heightened risk to food inflation.

Other than repo rate, RBI will soon increase the cash reserve ratio of banks by 50 basis points to 4.5%, which will pull out about Rs 87,000 crore of liquidity from the financial system.

The sudden turn in the approach of MPC during an unscheduled meeting raises the question: What is the main objective of the surprise announcement? MPC, according to Das, hopes to preserve “macro-financial “stability” amidst increasing volatility in the financial markets.

It’s likely that MPC is in part reacting to interest increases in major Western financial markets as it is leading to a reallocation of global investment portfolios. Separately, the extended mismatch between retail inflation rates and the repo rate, which is a benchmark for many other commercial interest rates, may lead to Indian savers taking unwarranted risks as protection against high inflation.

Today’s announcement is a sign that going forward it is fiscal policy which has to take the lead in protecting Indian consumers from an erosion in their purchasing power. As for RBI, it’s going to focus on its core task of controlling inflation.


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