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India’s monetary panel sees need for more interest rate hikes

India’s monetary policy makers voted to hike interest rates for the first time in nearly four years and moved to drain billions of rupees from the banking system to tame prices.

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Mumbai: India’s monetary policy makers pitched for front loading interest rate hikes as the central bank plays catch up amid worsening outlook for inflation, minutes released Wednesday of the RBI’s Monetary Policy Committee show.

The minutes shed light on the surprise rate decision by the central bank earlier this month. India’s monetary policy makers unanimously voted to hike interest rates for the first time in nearly four years and moved to drain billions of rupees from the banking system to tame prices.

Rising inflationary pressure, made worse by war-induced supply-chain disruptions, pushed prices of commodities including food, fuel and fertilizers. Inflation rose to an eight-year high in April running ahead of the Reserve Bank of India’s 2%-6% target range, while wholesale prices for the same month hit a three decade high.

“Waiting for one month till the June MPC would mean losing that much time while war related inflationary pressures accentuated,” RBI Governor Shaktikanta Das said. Further, it may necessitate a much stronger action in the June MPC which is avoidable, he added.

The rate setters felt that reversing extraordinary accommodation – in terms of both the policy rate and liquidity was the “right approach” as second order effects of inflation begin to take hold in the economy.

“It appears to me that more than 100 basis points of rate increases needs to be carried out very soon,” an external member Jayanth Rama Varma said.

Other external members including Ashima Goyal also echoed a similar sentiment. Here are some excerpts from the minutes of the MPC meeting held May 2 and 4:

  • In view of a reasonable recovery and the sharp rise price pressures, which will also raise inflation projections, frontloading of hikes was required to prevent the real rate becoming too negative, Goyal said.
  • Shashanka Bhide, another external member in the panel, said monetary policy measures were necessary to break the inflation dynamics.
  • Michael Patra, deputy governor at RBI said that the momentum of recovery was still below full strength. “Geopolitical spillovers have thrust upon us a surge in the momentum of inflation we can ill afford. As long as the geopolitical crisis and retaliatory actions persist, so will inflation,” he added.
  • Rajiv Ranjan, an executive director at RBI who succeeded Mridul Saggar, said inflation expectations could become unanchored if the monetary policy decided to see-through these shocks. –Bloomberg

Read more: LPG price hiked by Rs 3.5, crosses Rs 1,000 mark


 

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