Shaktikanta Das: Waiting until June means losing time in case of war-related inflation

Even with the recent sharp rise in inflation due to supply-side factors, mostly war-related that are beyond the control of the central bank, the Reserve Bank’s MPC has decided to raise policy rates by 40 bps to 4.4 percent in early May. Rate action was crucial to managing inflation expectations as inflation is becoming more generalized, the latest MPC minutes indicate.

The MPC has unanimously opted for price stability over growth as it sees India’s macroeconomic fundamentals intact, excluding food and energy inflation. The MPC’s April statement raised the risk of inflation and eased concerns about growth.

Improving communication-intensive services in the revival of urban demand is driving personal costs. The outlook for agriculture remains positive in view of the normal southwest monsoon winds forecast for 2022, which will support rural use.

“The return to domestic economic activity is slowly normalizing,” Governor Shaktikant Das said in his minutes released on Wednesday. “The rising outlook for inflation calls for timely action to mitigate the effects of the second round, which could anchor inflation expectations. Higher uncertainty and volatile financial markets may add to such volatility of expectations.”

A high inflation print also adds to the risk of a negative real rate. Ashima Goel, a professor at the Indira Gandhi Institute of Development Research, said, “In view of the logical recovery and the sharp rise in inflation, the rate hike is needed to prevent the actual rate from becoming too negative.” “Negative real interest rate risks include buying household gold increases the current account deficit and hurts financial intermediaries.”

Justifying the timing of the RBI’s rate action, the governor said that the war in Europe is now expected to be much longer than previously expected. April inflation was expected to rise further to an eight-year high of 7.79 percent, higher than the target band of 2-6 percent. “So it needs to work through an off-cycle policy meeting. Waiting for a month until June means MPC As the war-related inflationary pressures mount, more time will be lost.

External member Jayant Verma, a professor at IIM, Ahmedabad, hinted at a sharp rise in rates soon, saying that much needed to be done as MPC prioritizes economic recovery at the height of the epidemic in early 2021 and delays in normalization. “It seems to me that an increase of 100 basis points needs to be done very soon,” Verma said.

Configuration that exists today – US yield tightening; The US dollar is getting stronger; Stop selling equities; Emerging currency devaluation and capital outflows; Rising Debt Crisis – Reminiscent of 1993-1994 followed by a cascade of emerging market crises. “At least, there are signs of a generalized financial loss,” said Deputy Governor MD Patra.