Clipped from: https://www.business-standard.com/finance/news/mpc-should-raise-rates-by-25-bps-next-week-economists-tell-rbi-123032800730_1.html
Say current dynamics warrant hike, but RBI should keep liquidity stance flexible
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At a meeting on Monday with senior officials of the Reserve Bank of India (RBI), economists suggested that the central bank raise the repurchase, or repo, rate by 25 basis points (bps) at its next policy review, which begins on April 3, as the prevailing dynamics of domestic growth and inflation warrant more tightening.
The Monetary Policy Committee will release its statement on April 6. The repo rate is the interest rate at which the RBI lends money to commercial banks.
While the MPC’s next meeting comes amid the turmoil in the global banking sector, sparked by the collapse of the US-based Silicon Valley Bank and the takeover of Swiss lender Credit Suisse, economists pointed out that other central banks had opted to press ahead with rate hikes to combat inflation.
“There is a distinction that is being made with regard to financial stability and inflation. Given the current dynamics, the RBI should hike by 25 bps. Globally central banks have been hiking rates despite the recent events. This was the feedback most economists gave the RBI,” sources aware of the developments told Business Standard.
The RBI officials present at the meeting did not provide any inputs while hearing the views of the economists, the sources said.
The RBI has raised the repo rate by a total of 250 bps since May 2022 in an attempt to bring inflation within its tolerance limit.
Since April 2022, the central bank’s stance has been focused on withdrawal of accommodation. The repo rate is currently at 6.50 per cent.
Over the past couple of weeks, the US Federal Reserve, the Bank of England, and the European Central Bank have all raised interest rates and highlighted the need to remain committed to bringing inflation down.
While some economists at the meeting recommended that the RBI pause rate hikes, the majority were in favour of more tightening as inflation remains outside of the central bank’s mandate of 4 per cent, with a variation of 2 per cent either side.
An email sent to the RBI did not elicit a response till the time of going to press.
Economists were also said to have suggested the RBI maintain a neutral stance on its liquidity operations, in light of the uncertainty surrounding the future trajectory of economic growth and inflation.
“The view was largely that the RBI should maintain a flexible stance on liquidity because they could be called upon to either inject liquidity or continue withdrawing, depending on the situation. There is a lot of uncertainty about how growth dynamics will play out. Keeping that in mind, it would be better for the RBI to continue keeping all options open,” a source said.
In its last policy review in February, the RBI raised the repo rate by 25 bps while maintaining vigilance on inflation. Though some financial market participants expected that the RBI would signal a pause on further tightening in February, the central bank said that its future actions would depend on evolving data.
Data released since the policy statement showed that inflation was well above 6 per cent in both January and February. With consumer prices having surprised on the upside over the past two months, it seems likely that the RBI’s forecast of 5.7 per cent for the current quarter would be overshot.
Meanwhile, India’s gross domestic product (GDP) growth was at 4.4 per cent in the December quarter (Q3), lower than 6.3 per cent in the previous quarter. However, GDP growth was in line with the RBI’s projections. The central bank has projected GDP growth for the whole of the current financial year at 6.8 per cent.