RBI Governor hints repo rate hike says expectation in next policy a no-brainer

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Highlights

  • RBI Governor Shaktikant Das has hinted at another interest rate hike in early June
  • Shaktikant Das says growth prospect is a ‘no-brainer’
  • The next meeting of the Monetary Policy Committee (MPC) is scheduled for June 6-7

RBI Governor Shaktikant Das on Monday signaled another interest rate hike in early June to reduce the stubbornly high inflation rate that has been above the tolerance level for the past four months.

“Expect a price increase, it’s nothing to worry about. Something will increase but how much I can’t say right now … saying that 5.15 (percent) may not be very accurate,” Das said in an interview.

The next meeting of the Monetary Policy Committee (MPC) is scheduled for June 6-7.

The RBI, in its first rate move in two years and its first rise in almost four years, raised the repo rate by 40 basis points to 4.40 percent after an off-cycle meeting earlier this month.

In April, the RBI raised its inflation forecast for the current fiscal year to 4.7 percent from the previous 4.5 percent and lowered its GDP estimate to 7.2 percent from 7.8 percent for 2022-23, citing the impact of growing geopolitical tensions. Russia-Ukraine war.

Das added that the RBI and the government have entered another phase of concerted action to reduce inflation.

The RBI has taken a number of steps in the last 2-3 months to reduce inflation, he said, adding that the government has taken steps to curb wheat exports and reduce excise duty on petrol and diesel. Putting all this together would have a devastating effect on inflation, he added.

Retail inflation has been above the RBI’s high tolerance level for the past four months.

The government, led by the RBI governor, has forced the MPC to keep retail inflation between 2 and 6 percent.

According to the latest print, consumer price index (CPI) inflation rose to 7.79 per cent from 6.95 per cent in the previous month and 4.21 per cent in April 2021.

“Today, interest rates are negative in almost every country, except Russia and Brazil. The inflation target for a developed economy is about 2 percent. With the exception of Japan and one other country, inflation in all developed economies is over 7 percent,” he said.

“We will move towards a positive real rate, but it is impossible to predict how quickly it will be due to the growing situation,” the governor said.

There is also a silver lining for the economy, as private investment is showing signs of improvement.

The return to domestic economic activity is gradually generalizing, Das noted in the minutes of the MPC meeting which ended on May 4.

“Improving communication-intensive services in the wake of urban demand is driving personal costs. The outlook for agriculture remains positive in view of the normal south-west monsoon forecast for 2022, which will support rural consumption. Increased registration, ”he said.

Exports remain resilient as high import growth continues, indicating a revival of domestic demand, he said.

Nevertheless, in the wake of protracted geopolitical conflicts, high global commodity prices, prolonged shortages of critical inputs and tightening of central bank policies have negatively impacted domestic economic activity, he said.

Regarding the revenue deficit, Das said the government could meet its target. He further believes that there is no need to increase the credit limit as well.

The revenue deficit is projected at 6.4 percent of GDP in 2022-23, in line with the broader path of revenue consolidation announced last year to reach a level below 4.5 percent by 2025-26.

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