Taming the Horse of Inflation

In a surprise move, Reserve Bank of India (RBI) has hiked repo rate by 40 basis points (bps), the first such hike in almost four years, accompanied with an increase in CRR by 50 bps to align with the current market realities, but it came as a double whammy for the markets that crashed. The bloodbath in equities continued even today.

The market was definitely expecting a rate hike by RBI, but in a slower pace. The surprise announcement is a departure from the usual practice of taking a call on rates periodically in the meetings of Monetary Policy Committee (MPC). But the urgency underlines the extraordinary situation we are in now.

There has been a concrete evidence that prices have been on the upswing. The consumer price index (CPI) has crossed the 7% mark. The jump in fertiliser prices and other input costs have direct impact on food prices. Prices of imported cooking oils like palm oil have also gone up considerably. The price of oil in the wake of Russia-Ukraine war remains at over 105 dollars per barrel in the international markets. 

Inflation is expected to rule at the elevated levels for which proactive calibrated steps were required to be taken to tackle it. RBI has, therefore, responded to market forces prudently and well in time.

The rate hike is also beneficial for the banking sector, as the risk will get repriced properly. Banks had already started tweaking their rates upwardly by 5 or 10 bps to align with the market forces.

This rate hike doesn’t, however, appear to be one-off. A series of rate hikes may be in the offing. Interestingly, RBI’s rate hike preceded the US Federal Reserve’s decision to hike the policy rate by 50 bps, the biggest since 2000. The fear of recession and stagflation led to a massive drop in the US markets also last night. Major central banks have already gone on a rate hike spree, as inflationary pressures are not transitory in nature.

A rate hike at this juncture by RBI would help preserve macro-financial stability amidst increasing volatility in financial markets. The action of RBI should, therefore, be seen as a growth positive aimed at containing inflation and supporting growth.

This sort of agility in the economy is needed to make it capable of weathering any challenges in the present geopolitical conditions.


–Kaushal Kishore

18 Comments

  1. The projection of rising prices of oil and the increase in inflation, Kaushal, is all very well in the view of banks and oil providers like Shell and others but the rising of the prices in everything, not only petrol and food, makes many families suffer considerable hardship. Here, in yesterday’s local elections the ruling conservative party lost many seats. The violent protests in Sri Lanka seem close to civil war rather than just dissatisfaction with their government’s inept dealing with the financial problems. As far as I know, India is helping them, but people had to feed their children and their elderly parents. Here, there is talk about a tax on absurd profits of the oil companies.
    I am curious, Kaushal, what would be your solution to help the struggling population, short of stopping the war in Ukraine, the cause of this mayhem, which we cannot do?
    Apologies for talking so much but in many countries, this is the most important topic

    Joanna

    Liked by 1 person

    1. Thank you, Joanna for sharing your reflections in detail. Oil prices have spiralling effect almost on all items. In our country, excise duty both of centre and state is heavy, that further increases the price. I’m of the considered view that a government must go if it’s not in a position to manage finance and feed the citizens. Sri Lanka’s case is different, where the government under Chinese debt trap was being ruled by a family (8 member of family in govt) and distributing freebies. People don’t realise when things are moving smoothly. Who could visualise three years back that Sri Lanka would be in such a mess. Slow adoption of organic farming is okay, but abrupt stoppage of using chemical fertilisers would see shortage of foodgrains as happened in Sri Lanka. There are other smaller countries which will also be ruined by the generous Chinese loans.
      As regards Ukraine war, talk is the only solution. A sincere effort to bring Russia and America across table has not been made. India and Israel had taken some initiatives, but it’s very difficult to convince both parties, as the other party has its own vested and commercial interests for war to continue.. Supplying arms to Ukraine is not a solution. Ukraine and its poor people are bearing the brunt. They are sufferers, not beneficiaries. UNO has become a puppet, a mute spectator. In the present circumstances, I don’t see any hope, as both sides are adamant. The result is that the whole world is suffering directly or indirectly.

      Liked by 1 person

  2. Most honest analysts are expecting a recession here in the United States. The U.S. federal reserve is only taking minimal steps to combat inflation while the government continues to spend, spend, spend.

    Liked by 2 people

    1. That’s very true! Central bank can take only minimal steps. The enabling atmosphere has to be created by the government. But democracy has its own cost too. Thank you, Dawn for sharing your concerns. The fact is that recession is on the cards. We can’t escape.

      Liked by 2 people

    1. It’s everywhere, Cindy! Prices are skyrocketing. Governments are spending money left, right and centre on popular schemes and freebies for winning elections. Thank you for liking the post.😊💖

      Liked by 1 person

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