Bikky Khosla | 09 May, 2022
In an off-cycle meeting, the Reserve
Bank of India (RBI) last week hiked the repo rate by 40 basis points (bps) to
4.40 percent with immediate effect. The central bank is facing an uphill task
in containing the current inflation, and though the move, which was surprising as
it was taken between two monetary policy reviews – according to the Finance
Minister- didn't, however look like a panic reaction. It was expected sooner
During the first monetary policy
review of FY23, RBI last month had kept the policy stance as 'accommodative',
but raising its inflation forecast to 5.7 percent against the previous estimate
of 4.5 percent, signalling the end of an over two-year-long period of ‘ultra-accommodation’.
On the other hand, GDP growth projection was lowered to 7.2 percent from an
earlier estimation of 7.8 percent, in the background of escalating geopolitical
Now, the latest rate cut, amid the
current inflation driven by the lingering pandemic and a nagging war does not
seem surprising. Aggregate demand and growth might be affected drastically by
these factors. Our domestic consumption is yet to see healthy rise, and demand
recently seen in sectors like affordable housing and automobiles might slip
with a rise in borrowing costs. Also, there seems to be little room for expanding
fiscal spending due to fear of rise in inflation as well as fiscal deficit.
So, as for the central bank, it is going to focus on
inflation – to protect Indian consumers from an erosion in their purchasing
power - rather than on growth. Meanwhile, the Rupee, which has been staggering
since the beginning of the year, hit an all-time low yesterday, bringing further
bad news for the inflation-hit economy. This further highlights the urgency on
part of the central bank to focus on reining in inflation.
I invite your opinions.