RBI holds key rates at record lows, ups inflation forecast
The Reserve Bank of India (RBI) on Friday kept two benchmark economy-wide interest rates unchanged at record lows, signalling that the central bank continues to prioritise growth recovery despite inflationary winds sweeping the world and India in the aftermath of the Russia-Ukraine war.The central bank’s six-member Monetary Policy Committee (MPC) voted to hold the repo and reverse repo rates at 4% and 3.35%, respectively. Such a policy approach is referred to as an “accommodative stance”, meaning it remains conducive for easier borrowing.The RBI, however, revised the country’s inflation forecast to 5.7% for financial year 2022-23 from the earlier 4.5%, acknowledging pressures of inflation from crude oil crossing $100/barrel. High inflation not just erodes the value of money and savings, but can ultimately hurt growth itself.“Sky may be overcast, but we will use all our energies to let sunlight shine on India’s future. It is the faith that steers us through stormy seas, moves mountains and [helps us] jump across the ocean,” RBI Governor Shaktikanta Das said in his address.Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Reserve Bank, while reverse repo is the rate at which the central bank borrows money.These rates are key to boosting credit and investments by businesses in the economy as India pushes its nascent economic recovery. The MPC’s review of the economy is key to markets and general business sentiment.The central bank also cut its gross domestic product (GDP) growth forecast for 2022-23 to 7.2% from 7.8% mainly on account of inflation pressures.Quarterly projections show the bank expects 6.3% inflation in Q1, 5% in Q2, 5.4% in Q3 and 5.1% in Q4.Globally, inflation is on the rise and high prices have found their way into the country through costlier oil. But, at the moment, the RBI is sanguine that it can keep interest rates low.Rich economies are fast raising interest rates to tamp down high inflation. The US Federal Bank raised its benchmark rate by 25 basis points to a range of 0.25%-0.5% last month, the first interest rate hike since 2018.Lower interest rates make borrowing by businesses and governments easier, helping to increase the economy’s output and GDP rate, but they can also fan inflation. The government, for instance, makes good a chunk of its fiscal deficit – the difference between the government’s earnings and expenditure – by borrowing money against sale of bonds.A record rabi harvest would help to put a lid on food inflation, the central bank said. In its estimates, the bank said that assuming oil at $100, the GDP growth is forecast at 16.2% in April-June 2022, at 6.2% in July-September 2022 and at 4.1% in October-December 2022; growth for January-March 2023 has been pegged at 4%.Edible oil prices are likely to remain high, and spike in crude oil poses “substantial risk to inflation”, the bank said.
ABOUT THE AUTHOR
Zia Haq reports on public policy, economy and agriculture. Particularly interested in development economics and growth theories.
…view detail
