How Central Bank May Tackle Rising Inflation with out Hiking Interest Rates


Even because the RBI’s Monetary Policy Committee is about to satisfy this week to resolve on the important thing rates of interest, the coverage makers have a problem to include the worth rise within the nation, brought on by excessive petrol and diesel costswith out hurting the financial restoration, Experts mentioned the RBI could deal with the prevailing excessive inflation by way of “liquidity administration” without changing the key repo rate.

The Reserve Bank of India (RBI) is mandated to keep inflation within the range of 2-6 per cent, while the CPI-based inflation rate in February stood at 6.07 per cent. The rate in January had stood at 6.01 per cent. In its previous bi-monthly monetary policy review in February, the RBI had projected the Consumer Price Index (CPI)-based inflation at 4.5 per cent for the current financial year 2022-23.

The six-member MPC will meet between April 6 and 8 to decide on the policy interest rates in the country. It will announce the outcome of the meeting on the last day of the meeting — April 8 (Friday).

HDFC Bank Chief Economist Abheek Barua said the RBI is expected to revise upward its inflation projection for the current financial year by 75-80 basis points. “The central financial institution will attempt to management inflation by way of liquidity administration with out hurting the financial restoration by altering repo price.”

Liquidity is the cash available in an economic system and the central bank manages it through open market operations (OMOs), cash management bills and reverse repo operations, apart from controlling the printing of new currency notes.

Barua also said the MPC is likely to keep repo and reverse repo rates unchanged but will revise its policy stance to ‘neutral’ as compared to ‘accommodative’ earlier. “High inflation charges in India might be an issue for family demand within the economic system.” A basis point is equal to a 100th of a percentage point.

Similarly, Bank of Baroda Chief Economist Madan Sabnavis said that on the inflation front, the RBI will wait and watch this time and raise interest rates by the end of the year in case inflation rises further.

“The repo and reverse repo rates are expected to remain unchanged this time but the MPC will change its stance to ‘neutral’ from ‘accommodative’ currently, given the inflation scenario in the country,” Sabnavis mentioned.

Petrol and diesel costs have elevated over Rs 8 previously two weeks. After a four-month hiatus, the petroleum costs within the nation have been rising following the Assembly election leads to 5 states final month. The ongoing Russia-Ukraine battle has pushed up the crude oil costs to a seven-year excessive.

Crisil Chief Economist DK Joshi mentioned the excessive inflation within the nation is a trigger for fear and is basically on account of exterior components, together with the continuing Russia-Ukraine battle. “The RBI’s MPC is predicted to maintain the repo price unchanged however could resort to elevating reverse repo price by 25 foundation factors.”

GDP Growth Projects

The experts also said the central bank is also likely to revise downwards its gross domestic product (GDP) forecast due to supply chain disruptions and global uncertainties caused by the Russia’s invasion in Ukraine.

After the last policy meet in February till now, rating agencies India Ratings, Moody’s and ICRA have revised downwards their growth projections for India due to elevated commodity prices and fresh supply chain issues arising from the Russia-Ukraine conflict. The fresh COVID-19 wave in China also weighed.

India Ratings has revised downwards its GDP growth forecast for 2021-22 to 8.6 per cent from the consensus 9.2 per cent projected earlier. Moody’s Investors Service has cut India’s growth forecast for 2022 to 9.1 per cent from the earlier estimated 9.5 per cent. ICRA has lowered India’s FY23 GDP growth forecast to 7.2 per cent from an earlier projection of 8 per cent. FICCI expects the GDP to grow 7.4 per cent this financial year.

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