Repo rate cuts of Covid-era fully reversed
The RBI on Friday raised the benchmark repo rate by 50 bps, restoring the pre-Covid rate regime, but the central question is whether inflation has peaked. Governor Shaktikanta Das repeatedly said inflation remains ‘uncomfortably and unacceptably high’ but also announced signs of high inflation bottoming out. If so, does it warrant an aggressive 0.5% hike? Moreover, the RBI’s Monetary Policy Committee (MPC) took cognisance of the IMF’s warning on global recessionary risks and that it’ll affect us, yet the distinguished members unanimously voted for 50 bps.
It’s like saying we feel the fear, but we’ll hike anyway, even if that amounts to tightening into weakness. But for how long? Das said they have no clue when to pause, and markets promptly revised repo rate projections to 6% by next quarter itself against the estimated 5.75% by March 2023. In other words, alongside high inflation, households must survive high borrowing costs, even though incomes are unlikely to move an inch.
Agreed, the MPC has no choice but to hike, but few expected 50 bps barrelling towards markets, which Das blamed on the global monetary bonfire. Of late, 50 bps has become the norm. With some even opting for 75–100 bps rate hikes, RBI can’t allow for widening the spread between our interest rates and others, particularly the US, where capital is flowing out, weakening the rupee. So to manage the tightrope walk between growth, inflation and capital outflows, MPC’s ‘whatever it takes approach’ appears justifiable.
The MPC is facing its biggest challenge since the inflation targeting regime began in 2016. As Bank of England Governor Andrew Bailey recently noted, such committees were set up for times exactly like these. The worth of any regime is tested in the difficult, not the nice, times, and their job is to hit the target (4% inflation in our case). No ifs or buts. While Das rightly mentioned that future policy actions would be made in real-time, the MPC must exercise caution to avoid excessive tightening that could hurt growth.