The RBI’s surprise rate hike may have been prompted by its failure to convince the government to cut excise duties on petrol and diesel and take other supply-side measures to rein in the oil. runaway inflation, sources familiar with the central bank’s thinking said Thursday.
There was a record rise of Rs 10 per liter in petrol and diesel prices in 16 days from March 22, which further fueled already high commodity prices.
The RBI, which has a mandate to ensure inflation is below 6%, acted with a 0.40% increase in the repo rate to check prices before they spiral completely out of control. “You should watch this metric because when it gets tough, RBI is now on its own,” a source said.
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The RBI has from time to time urged the government to reduce excise duties on fuels. He also called on state governments – which also impose levies, further raising fuel prices – to do the same, but again failed to move the needle, the source said.
The RBI has said ‘enough’ and now that the time for action has come, it will act alone in its fight against inflation, the source said. The fuel price hikes began after the end of elections in Uttar Pradesh and other states – ending a nearly three-month lull without review despite rising global crude prices.
Last year, the Center cut excise duty by Rs 5 on petrol and Rs 10 per liter on diesel to curb inflation. BJP-led states have also reduced excise duties, but many others have not, which recently prompted Prime Minister Narendra Modi to urge the same.
On Wednesday, the RBI’s six-member monetary policy committee decided to raise the repo rate, at which the central bank lends to the system, by 0.40%. It also increased the cash reserve ratio, or the proportion of deposits parked by banks with it, by 0.50% to suck up Rs 87,000 crore of excess cash.
The move will likely lead to a spike in borrowing costs, which will dent the economy’s growth prospects as it emerges from the pandemic. The source, however, made it clear that the RBI will definitely fulfill its responsibility as debt manager to the government and ensure that the large borrowing program of Rs 14 lakh crore goes smoothly.
One should not look at the borrowing program from its quantum alone, but in the context of GDP, the source said, pointing out that it has come down to 5% from as high as 6.8% .
First post: STI