RBI: Currency outweighs inflation relief for monetary panel for now

Mumbai: Thanks to Jayanth Varma and Ashima Goyal, the external members of the Monetary Policy Committee, there appears to be a sense of relief at the magnitude of future Reserve rate hikes.

If the conservative Varma suggests that the repo rate at 6% is good enough for a pause, that will be a sufficient signal that the RBI is close to the prime rate for now. After a fourth straight increase, the repo rate stands at 5.9%. To add weight to Varma’s stance, Goyal said the MPC could end up overdoing the hikes and hurting the economy.

Both argue that monetary policy operates with a lag, so it makes sense to take the foot off the pedal and take stock of past hikes ahead of the fourth 50 basis point hike. A basis point is 0.01 percentage points.

“When the delayed effects of monetary policy are as great as in India, overreacting can be very costly,” Goyal wrote persistently. Now that forward-looking real interest rates are positive, you have to be very cautious.”

Varma, who has in the past questioned extraordinary monetary stimulus to combat the Covid-triggered slowdown, surprised.

“I think the MPC should now raise interest rates to 6% and then pause,” Varma said in the minutes. “After this increase, a pause is required because monetary policy acts with delays. It can take three to four quarters for policy rates to feed through to the real economy, and the peak effect can last up to five to six quarters.”

For her part, Goyal says the real interest rate could be positive 75 basis points next year based on RBI’s forecast for the fiscal first quarter, or 100 if the repo rate is raised to 6% as Varma suggests.

But there is a reversal in the role of MPC members, particularly from the RBI, that went beyond the MPC’s rate cut to revitalize growth. When external members pause, RBI economists become particularly vigilant.

“Troublingly, absent these transitional effects, inflation has become unrelenting,” Deputy Governor Michael Patra wrote. “RBI’s forward-looking surveys suggest that selling prices in manufacturing and services could continue to rise as the pass-through from input cost pressures remains incomplete,” he said.

While Varma-Goyal’s public comment may be muted due to the inflation targeting law specifying only “growth and inflation”, Patra’s reference to the “exchange rate” is now becoming a key element of monetary policy.

“Exchange rate volatility (read devaluation) amplifies these core price pressures, especially given that key import prices are invoiced in US dollars,” Patra said.

Currency movements during normal times are determined by an economy’s fundamentals. Now Federal Reserve Chair Jerome Powell, who threw away trillions of dollars for free last year, is acting like an Indian moneylender, forcing leveraged investors to dump all other assets bought with cheap USD.

Governor Shakkanta Das describes it as the “third shock”.

“The financial and external sectors also remain under the Reserve Bank’s close scrutiny,” Das wrote.

What is happening in the financial and foreign sectors?

The UK has just sacked its finance minister over a fiscal mess. US and UK government bonds are underperforming risky stocks. The S&P 500 has lost more than a quarter of its value. The Japanese yen is down 30% against the US dollar.

“There could be more economic shocks. Risks to financial stability are mounting: rapid and disorderly asset repricing could be compounded by pre-existing vulnerabilities, including high levels of sovereign debt and liquidity concerns in key segments of the financial market,” said Kristalina Georgieva, chief executive of the International Monetary Fund, before his annual conference attended by Governor Das and Deputy Governor Patra that their return from such a meeting last time marked the start of the rate hike cycle.

https://economictimes.indiatimes.com/markets/stocks/news/currency-outweighs-inflation-relief-for-monetary-panel-for-now/articleshow/94903583.cms RBI: Currency outweighs inflation relief for monetary panel for now

Russell Falcon

Pechip.com is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – admin@pechip.com. The content will be deleted within 24 hours.

Related Articles

Back to top button