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'MPC members showed urgency to contain inflation'
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IANS | 23 Jun, 2022
The unanimous 50bps hike in the repo rate recently by the Monetary
Policy Committee (MPC) and a sharp upward revision in the inflation
forecast, depicted continued urgency on policy catch-up amid the MPC's
reassessment of the inflation outlook, said Emkay Global Financial
Services in a report.
The minutes also indicated the rate trajectory ahead.
The RBI released the minutes of the MPC meeting held during June 6-8, 2022 on Wednesday.
According
to Emkay Global, the broadening of inflation pressures and
generalisation and persistence of inflation made most members
uncomfortable, even though some reckoned the largely imported nature of
the current inflation.
"Most members believed that, amid fears of
second-round effects on estimates, an early hike was necessary to avoid
any unintended economic shocks," Emkay Global said.
The minutes
also gave cues on the rate trajectory ahead. While all reckoned rates
needed to go up further, there was still divergence on the possible
terminal rate, the report said.
Prof Jayant Varma believed that
the RBI MPC, like most leading central banks, should also provide a dot
plot to signal its future rate projections, which will help in anchoring
long-term bond markets and inflation expectations.
Dr Michael
Debabrata Patra argued that the repo rate needs to be increased to at
least as high as the one-year-ahead inflation forecast suggests (near
zero), knowing that monetary policy works with lags.
According to
Dr Ashima Goyal, the current stage of recovery, the one-year ahead real
rate must not fall below -1 per cent, Emkay Global said.
Some members see a need for demand compression but recommend moving with caution
Emkay
Global said there were signs of caution in terms of aggressive policy
tightening. Dr. Patra suggested that current inflation is predominantly a
supply-side issue, and as a consequence, for monetary policy, rather
than materially compressing demand, managing expectations is the key.
Dr
Goyal argued that, unlike the West, India's inflation is yet neither
demand-driven nor seeing a wage-price spiral. Labour markets are not
tight and wage increases are not universal yet across rural and urban
sectors.
Meanwhile, the credit offtake is still modest - broad money growth at 8.8 per cent was much lower than nominal income growth.
Dr
Ranjan suggested continued monetary-fiscal coordination to anchor
inflation expectations while RBI Governor Shaktikanta Das stated that
the second-round effect of adverse supply shocks is what they are
targeting.
According to Emkay Global, the triple whammy of
commodity price shocks, supply-chain shocks and resilient growth has
shifted the reaction function in favor of inflation containment.
The
inflation prints of the next two quarters are likely to exceed seven
per cent, which could pressure the RBI into acting sooner rather than
later.
FY23 could, thus, see rates go up further by 75bps plus,
with the RBI now showing its intent to keep real rates neutral or higher
to quickly reach pre-Covid levels, it said.
As per Emkay Global,
a maximum tightening of the policy rate by six per cent by FY23, of
which liquidity tightening to two per cent of net demand and time
liabilities (NDTL) is tantamount to another estimated 25bps effective
rate hike.
However, the front-loaded rate hike cycle does not
imply a lengthy tightening cycle, and once they reach the supposed
neutral pre-Covid monetary conditions, the bar for further tightening
may go higher incrementally amid increasing growth inflation trade-offs,
Emkay Global said.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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66.20
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64.50 |
UK Pound
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87.50
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84.65 |
Euro
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78.25
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75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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