*****RBI to increase rates but hikes need not be endless, says Shaktikanta Das – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/indicators/rbi-to-increase-rates-but-hikes-need-not-be-endless-says-shaktikanta-das/articleshow/91823101.cms

Synopsis

Further, rate hikes need not necessarily be endless as recent reduction in fuel taxes and ban on exports of some commodities may have a positive impact in bringing down price pressures and the geopolitical situation may also turn helpful.

Inflation is generalised,

persistent

NSE 0.94 % and is here to stay, but the Reserve Bank of India will not use excessively harsh measures to restrain prices, said Governor Shaktikanta Das.

The Monetary Policy Committee will increase interest rates to contain inflation, but the objective is to ensure that the market doesn’t get any shocks and that growth revival is not derailed, he said.

Further, rate hikes need not necessarily be endless as recent reduction in fuel taxes and ban on exports of some commodities may have a positive impact in bringing down price pressures and the geopolitical situation may also turn helpful. “We are committed to containing inflation,” Governor Das told ET in an interview. “At the same time, we have to keep in mind the requirements of growth. It can’t be a situation where the operation is successful, and the patient is dead.”

Governor Shaktikanta Das shocked the market with a 40 basis points increase in the repo rate, the rate at which RBI lends to banks, in an off-cycle meeting earlier this month. It was read as a sign of the RBI attempting a catch-up with other central banks which were more aggressive in tightening. But Governor Das said that RBI had begun the tightening in April itself and had signalled further rate actions.

Govt Borrowing
“We changed the inflation projection (in April). We changed the stance to focusing on withdrawal of accommodation. We made the LAF (liquidity adjustment facility) corridor symmetrical, prioritised inflation. We introduced the SDF (standing deposit facility), which was a rate action. On top of that, a further repo rate action would have been too much of a shock to the market. Having taken so many measures, it would have meant an 80 basis points increase,” said Das.

While price pressures were initially fuelled by supply side factors like disruptions to supply chain due to the Covid related lockdowns in various countries, the war in Europe changed the underlying dynamics of inflation, necessitating a quick reaction.

“The current war in Europe has made inflation much more generalised, much more persistent,” said Das. “Today, we don’t know which direction countries are pulling. Therefore, inflation has become persistent. The war is likely to last longer, therefore the central banks have to act.”

Although price pressures are generalised, there could be some sudden turn of events which could provide room to avoid a continuous rise in cost of funds.

“Let us not assume that the rate increases would continue endlessly. There may be positive developments on the geopolitical side,” said Das.

Governor Das who has also served as the secretary at the department of economic affairs between 2015 and 2017s aid the government’s tax cuts and higher subsidies on food and fertiliser need not necessarily translate into higher borrowing leading to a spike in interest rates.

“I am not sure whether there will be additional borrowing,” said Das. “The government is also mindful of the fact that the fiscal deficit has to be maintained. Debt-to-GDP (ratio) also has to be kept in mind.”

Das said the central bank aims for a stable banking system and that its reforms are aimed at preventing crises like in the case of IL&FS and

Yes Bank

NSE 1.53 %.

“That is our endeavour. We have taken many reform measures. The banking sector remains quite robust. The financial health of all banks is stable. All the banks are in a healthy position.”

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