mpc minutes: Ukraine war has changed the dynamics of inflation, the rate needs to be increased

New Delhi: The minutes of the unscheduled May 2-4 meeting of the Monetary Policy Committee, where a rate hike was announced, highlighted the urgency of inflation among the members of the rate-setting panel.

The main reason for RBI Governor Shaktikant Das to announce the May 4 rate hike is the war between Russia and Ukraine that has pushed up global commodity prices, the MPC minutes showed.

“… the war in Europe – with the consequences of its supply chain, deficits and its consequences for prices – is now expected to last much longer than previously expected. It will happen, “Das said in a statement

“Therefore, work needs to be done through an off-cycle policy meeting. Waiting a month until the June MPC means losing as much time as war-related inflationary pressures mount. Furthermore, this may require stronger action at the June MPC which can be avoided. ”

According to the RBI chief’s forecast, the consumer price index-based inflation print for April actually improved – jumping to an eight-year high of 7.79 percent.

As such, the MPC is widely expected to raise the repo rate further from its current level of 4.40 percent.

While RBI executive director Rajiv Ranjan said the sharp rise in spending pressure was translating into a general rise in inflation and pointing to a significant shift in inflation drivers, Das said the RBI was committed to controlling inflation through all possible means.

According to Ranjan, the conflict in Europe fundamentally changed the dynamics of inflation.

“The expansion of inflationary pressures is also reflected in various CPI diffusion indices. There has been a sharp pick-up in these indicators for a seasonally adjusted annual rate of 6 per cent (SAAR) or above, especially in March, confirming that this is not only the case for price expansion in CPI but also that prices are very high. Increase, ”said Ranjan.

Neutral accommodation?

RBI Deputy Governor Michael Patra said the process of bringing back the extraordinary housing of the epidemic era was the right approach in the current environment.

The vessel incorporates both rate action and liquidity measures when referring to extraordinary accommodation. From March to May 2020, the RBI cut the repo rate by 115 basis points to a record low of 4 percent as much liquidity entered the banking system.

“Once this is done, we will reach a stage of neutral habitat – as opposed to habitat during extraordinary epidemics – from which responses can be calibrated at a later stage. Accordingly, I am voting to increase the policy rate by 40 basis points – effective 22 May 2020. The policy reverses the rate cut, ”read the part of the pot in minutes.

The deputy governor, however, warned

The risk of India’s economic growth comes as global monetary policymakers are forced to tackle inflationary pressures rather than supply-side factors rather than demand-led factors.

“… the pace of recovery is still at full strength, ensuring policy support,” says Potter, adding that global stagnation is shifting from a risky situation to a baseline scenario.

Stagflation refers to an environment of high inflation and weak growth.

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