Representational image.
Highlights
- Reserve Bank is all for a smooth monetary policy response and the desire to have smaller hikes
- Inflation has been massively impacted by Russia's invasion of Ukraine, source said
- Idea is to have a smooth policy response, not to put in large cold turkey responses, source added
Battling a sharp surge in inflation, the Reserve Bank is all for a smooth monetary policy response and the desire to have smaller hikes led it to tighten the policy in an off-schedule meet, a source said on Thursday.
Inflation has been massively impacted by Russia's invasion of Ukraine and will in due course also reflect the dent caused by Indonesia banning palm oil exports, the source aware of central bank thinking said, indicating that there was no other option but to respond.
"The idea is to have a smooth policy response, not to put in large cold turkey responses," the source said, making it clear that the preference is for smaller magnitude responses and not larger ones.
On what changed since April 8 -- when the last scheduled policy meet decided to maintain status quo -- and May 4, the source said the inflation print at near 7 per cent for March came way above RBI's expectations, and the momentum is likely to continue in April as well.
The RBI first shifted priorities to inflation, after over two years of focusing on growth, which was part of acclimatising everybody to the changed realities, the source said, adding Mint Road will be happy to be called as a "baby stepping central bank".
A sharp hike in rates would have also extracted a cost on the economy, the source said, adding that the short term sacrifice on growth through the gradual hikes will help the economy over the medium and long term.
The RBI has not been able to meet the 6 per cent upper end of the CPI target for the first quarter of the calendar year, and allowing it to fester would have jeopardised the second quarter as well, the source added.
The Ukranian war has alone led to a 1.20 per cent increase in the RBI's projections of inflation and 0.60 per cent dent on GDP estimate, the source said.
Wheat is facing inflation as traders are procuring at very high prices while additional impact on price rise may play out through mustard oil which may be heating up, the source pointed out.
"As long as the war exists, and now every likelihood is there of the war, continuing for six months, seven months, even a year, the sense that the world is getting is that as long as the war persists inflation pressures will persist," the source said.
It can be noted that following the 0.40 per cent hike in the repo rate and the 0.50 per cent hike in the cash reserve ratio which Governor Shaktikanta Das termed as ways of normalising the policy, many analysts have been saying that more such hikes are in the offing.
Specifically, they point to a line where Das mentioned about the 0.40 per cnet hike just taking away cut of a similar measure in May 2020, asking if a 0.
75 per cent hike is in the offing to nullify the March 2020 cut.
The source said that ideally, the policy response in June and the subsequent meets will be independent which will not be related to the current move but added that if inflation is "horribly higher", it will be dealt with as per the circumstances.
With questions being raised on the reasons how a central bank can hike rates while maintaining the policy stance "accommodatory", the source said such thinking is not correct.
"As long as inflation is very much above target and output is below potential, the policy stance has to be accommodative," the source said.
Under its pact with the government, the RBI is contract-bound to keep inflation under the 6 per cent mark and explain if it overshoots the target for three consecutive quarters. The source said the RBI has not "failed" and will fight till the end.
The equity-market impacting rate hike on Wednesday came on the day of the marquee LIC Initial Public Offering (IPO) opening up, and the source made it clear that "spooking" the marquee sale from the government was not the intention behind the move.
The rate hike was prompted only by domestic reasons and not in response to the US Federal Reserve's decision to hike the rate by 0.50 per cent later in the day, the source said, adding that the RBI wants to be solely looking at domestic reasons.
The source said 75 per cent of the push on the CPI is coming from the developments which are related to the Russia-Ukraine war, and the overall situation is worse, leaving little in the hand of anybody.
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