Informist, Wednesday, May 11, 2022
NEW DELHI - The Reserve Bank of India's Monetary Policy Committee hiked the policy repo rate in an off-cycle meeting last week in a bid stagger rate actions, a banking industry source said today.
"If the RBI didn't do the off-cycle rate hike in May, it would have had to jam all measures into one or two meetings in June or August," the source said. "The RBI decided to spread it out to minimise the pain."
In a surprise move last week, the MPC raised the policy repo rate by 40 basis points to 4.40%, the first rate hike in nearly four years.
In April, the MPC had left the policy rate unchanged, though it had sharply raised its inflation forecast. The committee had on Apr 8 raised its inflation forecast for 2022-23 (Apr-Mar) by 120 bps to 5.7%.
However, data released four days after the April policy showed CPI inflation rose to a 17-month high of 6.95% in March. It was the third straight month that CPI inflation had stayed above the upper bound of the RBI's medium-term target range of 2-6%.
The MPC members debated holding an off-cycle meeting after inflation data for March was released on Apr 12, the source said, adding that all the six members of the rate-setting panel were in regular touch after the inflation data.
When the committee decided to meet during May 2-4 to consider a rate hike, RBI Governor Shaktikanta Das and Finance Minister Nirmala Sitharaman were concerned that the off-cycle rate hike should not be construed as damaging the initial public offering of Life Insurance Corp of India, the source said.
The LIC IPO, which opened on the same day as the off-cycle rate hike, was finally subscribed nearly three times.
Though the current high inflation was mainly on account of supply disruptions, on which RBI action has very little impact, it was decided the time had come for a double-barrelled approach, the source said.
"There are limits to supply-side management," the source said.
The RBI hopes to bring down inflation in six-eight months by killing whatever little demand is there, the source said.
Whatever pandemic-related actions the RBI has taken in the last two years would eventually be wound down, the source said. "They have to be taken off or there will be a moral hazard of financial instability.
"It may take a year, it may take two years," the source said, without giving a timeframe.
The RBI is not doing any extraordinary hikes, just reversing the cuts announced earlier, the source said.
The MPC committee had cut the repo rate by a total of 115 bps between March and May 2020 after the onset of the COVID-19 pandemic in a bid to revive economic activity, which had come to a standstill following the nationwide lockdown.
The off-cycle hike reversed the repo rate cut on May 22, 2020, by the same quantum.
Asked whether the RBI would reverse the entire 115 bps of reverse repo rate cut by August, the source said, "You want to get out of the pandemic, right, or you want to stay there? One day, the pandemic measures will be taken out one by one."
In June, the committee will take a call on rates based on forecasts, which will factor in inflation numbers for March and April as well as the daily incoming data.
"If the forecast suggests that the tolerance band will be breached big time, the RBI will have to act."
Each monetary policy action should be treated as mutually independent and looked at on its own merits, the source said. End
Reported by Saji George Titus
Edited by Avishek Dutta
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