By There is no surprise today. Every economist and neighbor has predicted interest rate increases. And the reserve of Bank India (RBI) Governor of Shaktikanta DAS has just confirmed. The 50 Basis Point (BP) increase in the Repo level shows a single focus on the inflation of the Monetary Policy Committee (MPC). One BP is a hundredth of percentage. With this, MPC has climbed the repo level – where RBI lent short -term funds to banks – with a total of 140 bps in the current cycle of increase in level.
Clear Question First: Why did MPC go to increase the third interest rates today?
The answer is simple; Both the government and monetary policy makers are confused by high retail inflation that hurts all levels of society.
And that might not change in the future.
The key collection of the current watershed speech is that high inflation can underestimate the economy. Also, don’t miss the emphasis on withdrawing accommodative policies. This means that further interest rate increases cannot be ruled out.
With the inflation mold that hovers above the top band that is permitted six percent for two consecutive quarters and is likely to continue in the third quarter too, MPC is only about dealing with a large -public shame, because it is necessary to explain the failure to fulfill its inflation. written into parliament.
MPC has a mandate to maintain inflation between two and six percent. On that calculation, it hasn’t done a good job until now and the game is chasing.
Das acknowledged the limitations of MPC to overcome inflation in the current situation, quoting headwinds in the external sector. Unfortunately, he and his colleagues in MPC could not do much about external risks.
Increased commodity prices and weak rupees are at the peak of the external risk list. Increased interest rates globally have narrowed differences in interest rates between developing markets and the main economy, triggering the exodus of capital. War in Ukraine is another concern.
Foreign investors have withdrawn $ 26.83 billion from the Indian market so far. MPC is also under pressure due to a decline in rupees which has declined by almost seven percent this year.
So what’s next? It is still too early to say that the current cycle of rise increases is over. The path of inflation ahead will be the key, so it will be the evolution of the global economy and the direction of the Russian War in Ukraine.
RBI is fighting twin warfare – needs to control high inflation and support the falling currency. However, the central bank only has limited policy tools to face twin challenges which are mainly triggered by external factors. Therein lies the direct challenge of the watershed.
The main mandate of the central bank is to maintain stability. However, it let Jin inflation takes too long, to look for growth led by stimulus. Now it’s catching up with a steep and successive tariff increase.
But raising interest rates too fast will not be a good sign for the third largest economy in Asia where recovery from Pandemi is still fragile.
MPC, which sets the level in India, is obsessed with what is called an accommodative attitude for a very long time, by saying the slowing needs that are induced by pandemic are closer, even at the risk of short -term inflationary pressure. Panels may think high inflation will cool by itself. But this assumption has proven to be very wrong.
Increase in interest rates that are suddenly sharp can damage the newborn recovery in the economy, kill demand, and even start other stress cycles. Already, loan costs for smaller and middle companies have jumped 200-250 bps from last year.
High interest rates will reduce demand for consumer loans, a safe place for Indian banks that are hit by the default wave of the company. The soaring results can also worry about the Narendra Modi government because the loan center will be more expensive.
However, the choice before the watershed and his team in MPC remains limited.