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Last updated: 09 Aug, 2022  

Inflation.9.Thmb.jpg RBI's fight against inflation

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Bikky Khosla | 09 Aug, 2022

The RBI’s Monetary Policy Committee (MPC) last week increased the repo rate – the rate at which the central bank lends short-term funds to commercial banks -- by 50 basis points to 5.40 percent. This is for the third straight meeting repo rate has been hiked since May, leading to an increase by 140 basis points this fiscal. No doubt, the central bank’s last week move can be seen as the continuation of its fight against inflation.

The RBI Governor, commenting on these sharp rate hikes that have come in quick succession, pointed out that inflation has remained at 7% which is unacceptably high. "Even according to our projections, they remain above six percent for the first three quarters of the current year, the fourth quarter projection is 5.8 percent," he added, viewing that at a time when globally central banks these days are hiking rates by 75-100 basis points, 50 basis points hike is the new normal.

Today, the Indian economy is better placed on inflation than some major economies in the world and it seems the constant effort of the central bank will help to tame inflation soon. In addition, the government has recently taken various steps, like cut in taxes on petrol and diesel, curbs on food imports and cut in cement prices. These measures will definitely help the central bank’s fight against rising prices.

According to the RBI Governor, Rupee has been "faring much better than several reserve currencies as well as many of its EME and Asian peers" and its depreciation is not due to weakness in India’s macroeconomic fundamentals, but mainly on account of the appreciation of USD. But it seems that the central bank is still concerned about the falling value of Rupee and it wants to use interest rate hike also to protect the currency.

I invite your opinions.

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