RBI Deputy Claims Rate Hikes are the Only Option to Curb Inflation

The latest MPC minutes of the Reserve Bank of India revealed the opinion of Michael Patra. According to the Deputy Governor of the Indian central bank, they do not have any other choice, but to hike up interest rates in the country in order to keep the inflation under control. He said that it would take a long time for supply-side measures to be able to control prices.

MPC hiked Rates

Earlier this month, the Monetary Policy Committee (MPC) of the Indian central bank had hiked the interest rates in the country by 50 basis points. This came after they had already made an increase of 40 basis points in the previous month and the goal was to ensure that there is no broad-based inflationary pressure.

The minutes of the meeting were released and Wednesday and showed that Patra believes they had to use the monetary policy instrument, no matter how blunt it may be, because it will take time for supply to work. Thus, they do not really have any other option at this point.

The Deputy Governor added that with inflation still high and broadening shows that these high prices are still affordable, maybe because people are revenge spending after a stressed pandemic response.

Inflation Numbers

The month of May saw a marginal easing in retail inflation in the country, after hitting 7.79% in April. This was a high of 8 years, but even after declining, the inflation number was still higher than the tolerance of the central bank for the fifth consecutive month.

According to Patra, their goal should be to hike the interest rate enough that it is four quarters higher than inflation because it takes time for monetary policy to take effect. While most of the members were in agreement when it came to hiking up the repo rate, they did express concerns about how growth would be impacted.

Rajiv Ranjan, an MPC member and an executive director of the RBI, said that the government needs to work for ensuring that the economy can have a soft landing, while interest rates are being hiked for battling inflation. He stated that both state and center governments have to do their jobs in this regard.

Analysts’ Opinions

Analysts stated that the minutes of the MPC indicated that there is a difference in opinion amongst members about the future outcomes of inflation. Therefore, their stance on the peak repo rate and growth support is also different.

The analysts also stated that they believe the Indian central bank would hike up the interest rate by 60 basis points in their next two meetings. After that, they expect the MPC to hit a pause to see the impact of the monetary policy tightening on economic growth.

As for Patra, he said that they expect inflation to come down to 6% by the end of the fourth quarter in 2022/2023 and 4% in the next. He said that if inflation does start coming down, they will assess their policy again.

Leave a Comment