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US Fed Signals Aggressive Rate Hikes, Will Shaktikanta Das Raise Rates Amid Rising Inflation? 

Governor Das recently said that the central bank does not see any risk of the Indian economy going into stagflation currently.

US Fed Signals Aggressive Rate Hikes, Will Shaktikanta Das Raise Rates Amid Rising Inflation? 
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Amid the ongoing Russia-Ukraine crisis, the Reserve Bank of India’s (RBI) bi-monthly policy meeting ends on April 8 and despite the spiraling inflation, the RBI is likely to hold all key rates and retain the accommodative stance, analysts said. 

On Wednesday, the US Federal Reserve policymakers indicated an aggressive approach to fighting rising inflation. They said that half-point interest rates hikes “could be appropriate” multiple times this year. In the last month’s policy meeting, the Fed had raised the key repo rates by 25 basis points (BPs) for the first time since the beginning of the pandemic and had indicated six more rate hikes coming up in the remaining year. 

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Back in India, the retail inflation for February 2022, surpassed the RBI’s comfort limit of 6.1 per cent, whereas the wholesale inflation was seen at 13.1 per cent for the same period. Moreover, since the MPC meeting in February, the Brent Crude has gone up 21 per cent, domestic petrol, diesel pump prices are up 6.5 per cent, domestic LPG cylinder price is up 6 per cent, and commercial LPG is up 12.5 per cent, and edible oils are up around 12 per cent.

Governor Das recently said that the central bank does not see any risk of the Indian economy going into stagflation currently. However, the RBI will continue to support the economy by ensuring there is adequate liquidity in the system. 

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However, even as Das’ amiable MPC mulls over the complex task of balancing growth with inflationary pressures, it is worth noting that countries across the world are fearing stagflation—a period of high inflation and unemployment rate, and low growth. Keeping this in mind, central banks across the world are now steering clear of the easy monetary policy that they had deployed earlier to deal with the pandemic that had killed demand in the global economy.

Experts are of the view that against the backdrop of rising inflation, the RBI is likely to keep the key repo rates unchanged. 

YS Chakravarti, MD & CEO, Shriram City Union Finance, said, “Considering domestic growth is still in the early stages, the Committee is likely to keep key policy rates unchanged in the upcoming monetary policy meeting. Even though the RBI is reiterating its commitment to supporting growth and easy liquidity, some revisions to inflation and growth forecasts can be expected.”

“The overall growth rate has faced setbacks due to high commodity and input prices and chip shortages. Rising inflation, although transitory and imported, will weigh on the growth in the coming months. The rising input prices and increasing crude and global commodity prices do not hint toward a smooth path and will likely delay spending and hit business and consumer sentiment. RBI needs to continue to support small businesses and MSMEs, which are just starting to emerge from the pandemic-led slowdown. Demand for two-wheeler and retail or personal loans continues to outpace corporate demand, despite being below their pre-pandemic levels, and low-interest rates will help this trend sustain,” he added. 

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Since March 2020, the central bank has cut its key lending rate, or repo rate, by 115 basis points to support the economy in the face of economic fallout from the pandemic.

The RBI last cut its policy rate on May 22, 2020, in an off-policy cycle when Covid-19 posed an unprecedented challenge to the economy.

Since then, the central bank has maintained the repo rate-- the rate at which RBI lends money to commercial banks -- steady at a 19-year low of 4 per cent. The reverse repo rate -- the rate at which the RBI borrows from banks -- is 3.35 per cent.

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Since his appointment in December 2018, Das’ only role in the monetary policy has been to either bring the interest rates down or maintain the status quo with an accommodative stance. 

“We expect these benign inflation projections to be revised higher at subsequent meetings as input price pressures are yet to be passed on to the economy,” Standard Chartered Plc economists had written in a note following the MPC meeting. “Unless commodity prices correct significantly from here, achieving the FY23 inflation target of 4.5 per cent will be challenging,” they added.

While a low-inflation regime, like the one being pursued currently, allows the government to keep its interest outgo low, it can also kill demand in the segment of the population that does not depend on loans for its livelihood and survival.

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