RBI Governor Shaktikanta Das said there were early indications that inflation may have peaked in April, but multiple geopolitical crises and financial volatility must be taken into account.
RBI Governor Shaktikanta Das reiterated that inflation remains at an unacceptable and uncomfortable level, but domestic growth remains resilient, giving the MPC (Monetary Policy Committee) room to act.
During the first week of August, the central bank raised the key rate by 50 basis points to 5.40% to control inflation. With the latest hike, the repo rate, or the short-term lending rate at which banks borrow, broke through the pre-pandemic level of 5.15%.
“The high level of inflation continues to be widespread with 13 of the 23 CPI subgroups/groups, comprising almost 60% of the CPI basket, registering over 6% inflation in June 2022” , said Das.
The RBI Governor said that while there are early indications that inflation may have peaked in April, significant uncertainties remain due to negative global spillovers from simmering geopolitical tensions, volatility in global commodity prices commodities and financial markets.
“Sustained high inflation, unless dealt with effectively, could lead to the unanchoring of inflation expectations and their second-order effects. This requires an appropriate monetary policy response to prevent an upward drift in inflation against the target rate,” Das said.
“Our actions today aim to bring CPI inflation back within the target range first and then back towards the medium-term target of 4.0%, while supporting growth. our policy actions should bolster the credibility of monetary policy and anchor inflation expectations,” the Governor added.
The RBI MPC minutes indicate that rural consumption should benefit from improved agricultural prospects. “Demand for contact-intensive services and improving business and consumer sentiment are expected to bolster discretionary spending and urban consumption.”
The minutes said investment activity should be supported by the government’s investment spending push, improving bank credit and rising capacity utilization. However, elevated risks emanating from protracted geopolitical tensions, renewed global financial market volatility and tighter global financial conditions continue to weigh heavily on the outlook, he said.
According to RBI Deputy Governor Michael Debabrata Patra, frontloading monetary policy actions “can keep inflation expectations firmly anchored, realign inflation on target and reduce the medium-term growth sacrifice as that it is programmed in the current recovery”.
(Edited by : Shoma Bhattacharjee)
First post: STI