RBI Bank should not have raised the interest rate again. | The Repo rate, which is the most important interest rate, was raised to 6.5% by the RBI’s monetary policy committee for the sixth time in nine months. This time around, the rate of increase was 0.25 percentage points, which is lower than the average for the previous five times it occurred.
The monetary policy committee (MPC) came to a resolution with a 4:2 vote, with two of the committee’s external members voting against raising the interest rate.
They had a valid point.
When taken in context with the underlying statistics, the MPC’s judgment is difficult to defend as being appropriate.
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It is anticipated that a rise in interest rate will reduce total demand because it will make the cost of loans higher. If an excessive amount of demand is to blame for inflation, this is the tool to use. If this is the case, then increased interest rates will reduce the additional demand without having any impact on production or supply.
According to the data that is produced by the RBI and the union government, India does not appear to have a problem with excessive demand. Higher inflation is being caused by factors outside of the RBI’s control, such as disruptions in supply and conflicts arising from international politics.
Consider gross domestic product (GDP), the single most important indicator of how well the economy is doing overall. GDP growth is expected to decelerate from around 7% to 6.4% during the next fiscal year, 2023-24, according to the prediction provided by the RBI. To put it another way, we are not going to be in a position where there is going to be excess demand in the economy. The rate at which economic growth is slowing down is probably going to be the most significant cause for concern.
Nonetheless, inflation is still rather high, and the RBI forecasts that it will average 6.5% in the years 2022-23. The most important question is: What is the root cause of this inflation?
When the data on inflation over the past few years are separated into food and fuel prices, which are beyond of the control of the RBI, and core inflation, a concerning picture emerges. Since September of this year, the core inflation rate, which is more susceptible to regulation by the RBI, has been on an increasing trend. It has been raised for well over a year at this point, and the Monetary Policy Committee has accepted that it has been raised.
It is highly likely that the string of global disruptions that have occurred over the course of the past three years, like Covid-19 and the conflict in Europe, have contributed to disturbances in supply chain operations that have not yet been entirely resolved. As a result, inflation has been driven more by problems with the supply side than by excessive demand.
Raising interest rates right now is not the best way to manage the situation. It is important to keep in mind that it will take some time for any hike in the policy interest rate that the RBI implements to work its way through the entire commercial sector. The prior hikes in interest rates are still making their way through the economy and will continue to do so for some time.
In light of these considerations, the MPC ought to have refrained from implementing yet another interest rate hike today. It is quite doubtful that this will have any effect on underlying inflation in the foreseeable future. Nonetheless, this will have the effect of dampening demand across the entire economy.
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