Hike rates

MPC Minutes: War in Ukraine Changed Inflation Dynamics Needed to Raise Rates Quickly: MPC Minutes

NEW DELHI: Minutes of unscheduled May 2-4 Monetary Policy Committee meeting at which rate hike was announced show much higher degree of urgency about inflation among members of the rate setting panel.

Among the main factors that prompted Reserve Bank of India Governor Shaktikanta Das to announce the rate hike on May 4 was the war between Russia and Ukraine which led to a spike in global commodity prices. , according to the MPC minutes.

“…the war in Europe – with its consequences on supply chains, shortages and prices – is now likely to last much longer than expected. Under these circumstances, the inflation figure for April – which will be published on May 12 – is expected to be even higher,” Das’ statement read in the minutes.



“Therefore, it becomes necessary to act through an out-of-cycle political meeting. Waiting a month before the June MPC would be wasting so much time as war-related inflationary pressures build. Additionally, it may require much stronger action in the June MPC, which is avoidable.

As the RBI official had predicted, inflation based on the consumer price index for April was indeed high, hitting an eight-year high of 7.79%.

As such, the MPC is expected to further increase the repo rate from its current level of 4.40%.

While RBI Executive Director Rajiv Ranjan said the sharp escalation in cost pressures was translating into a general rise in inflation and pointed to a significant shift in inflation drivers, Das said that the RBI was committed to controlling inflation through all possible instruments.

According to Ranjan, the conflict in Europe has fundamentally changed the dynamics of inflation.

“Widening inflationary pressures are also reflected in various CPI release indices. There was a strong rally in these indexes for price increases at or above a seasonally adjusted annualized rate (SAAR) of 6%, particularly in March, confirming that it is not just the l impact of widening price increases in the CPI, but also that of price increases at a very high rate,” Ranjan said.


NEUTRAL HOUSING?


RBI Deputy Governor Michael Patra said the approach of reversing the extraordinary pandemic-era accommodation was the right approach in the current environment.

Patra included both rate actions and liquidity measures while referencing extraordinary accommodation. From March to May 2020, the RBI cut the repo rate by 115 basis points to a record high of 4%, while injecting massive amounts of liquidity into the banking system.

“When this is done, we will have reached a stage of neutral accommodation – unlike the extraordinary accommodation in times of a pandemic – from which the responses of the next stage can be calibrated. Accordingly, I am voting for a 40 basis point increase in the policy rate – reversing the policy rate cut made on May 22, 2020,” Patra’s party read in the minutes.

However, the Deputy Governor also cautioned against

risks to India’s economic growth while saying that monetary policymakers around the world were forced to tackle inflation problems emanating from supply-side shocks rather than demand-induced factors .

“…the momentum of the recovery is still below full strength, warranting policy support,” Patra said, adding that global stagflation was moving from a risk scenario to a scenario. reference.

Stagflation refers to an environment of high inflation and low growth.