New Delhi: As widely expected, the Reserve Bank’s monetary policy committee increased the benchmark short-term interbank lending rate by 50 basis points to 4.9% on Wednesday. But that will not be enough to tame the runaway retail inflation that is projected to be in the range of 6.7 to 7% in the current financial year. Economists believe that there is scope for further rate hikes by the RBI in the current year and the repo rate may touch 6% in this cycle.
After Wednesday’s rate hike, the repo rate under the liquidity adjustment facility now stands at 4.90%, the standing deposit facility (SDF) rate at 4.65% and the marginal standing facility (MSF) rate at 5.15%. The repo rate is the interest rate at which banks borrow short-term funds from the RBI whereas they park their surplus funds with the Reserve Bank at the reverse repo rate.
This hike is the second hike in the repo rate after the outbreak of Covid-19 global pandemic as the Reserve Bank had cut the repo rate to extremely low level to shore up the economy during the Covid-19 lockdown period. The first hike was effected by the RBI on May 4 this year when the Central Bank hiked the repo rate by 40 basis points following an unscheduled monetary policy committee meeting which was called in the wake of retail inflation touching 7.79% in April this year, a 95 months high.
The two hikes in a span of little over a month are in line with the market expectations. Sunil Sinha, Principal Economist at India Ratings and Research, says under such a situation Ind-Ra believes RBI has done the right thing by hiking policy rates to anchor both inflation and inflationary expectation. Economists believe that due to the protracted nature of ongoing war in Europe, the global commodity prices the Reserve Bank would need additional measures to contain the inflation.
“According to India Ratings, there is still a possibility of another 25-50 basis points hike in the policy rate in FY23 and the repo rate hike in this cycle could go up to 6.0%,” Sinha said in a statement sent to ETV Bharat.
Inflation to remain high this year
In its revised outlook, the Reserve Bank has projected the retail inflation to be above its comfort zone of 6% for the first 9 months of the current financial year that ends in March next year. The RBI said the retail inflation, measured as the Consumer Price Index (CPI) would be 7.5% during the first quarter (April-June), would be almost at the same level of 7.4% in the second quarter (July-September) and would decline to 6.2% in the third quarter (October-December 2020).
As per the RBI’s projection, the retail inflation, the prices directly paid by the consumers for consumption of services and goods, is expected to decline below 6% for the first time in the fourth quarter (January-March 2021 period), as it is expected to come down to 5.8% by that time.
Impact of Russia-Ukraine conflict
Sunil Sinha, who closely tracks government finances and macro-economic indicators, says the geopolitical situation arising due to the ongoing Russia-Ukraine conflict and accompanying sanctions on Russia have been impacting the entire world including India. He says with the Russia Ukraine conflict dragging on, the likelihood of elevated global commodity prices cooling off and supply side disruptions coming to an end does not appear to be a possibility in the near term.
“Although it is still uncertain that how long this conflict will last, but the ripple effect of the sanctions imposed on Russia and devastation of Ukrainian economy will be felt even after the conflict ends causing shortages in many key commodities, fracture in the international financial architecture and fears of deglobalisation,” Sinha told ETV Bharat.
Russia and Ukraine have significant share in the global production and exports of key commodities like oil and natural gas, food grains such as wheat and corn, Ukraine is also a big supplier of sunflower oil. Both the countries are also big suppliers of metals such as palladium, aluminium and nickel and also fertilizers.
