Despite Rising Inflation, RBI Keeps Interest Rates Low

Despite Rising Inflation, RBI Keeps Interest Rates Low

Bubble in the making as RBI averts eyes from inflation ball

RBI holds lowest interest rate on record with repo and reverse repo rates at 4% and 3.5% (Picture: Reuters)

By keeping interest rates at historic lows, despite rising inflation that has gripped the entire economy, the Reserve Bank of India is taking a huge leap into the dark and with it a great risk of put the Indian economy on a slippery slope from which recovery will be difficult.

The Reserve Bank of India’s monetary policy committee, which wrapped up its two-day meeting on Friday, decided to keep the repo and reverse repo rates at 4% and 3.5% respectively, the levels the lowest on record for both benchmark rates.

The decision was taken even as the MPC and RBI face spiraling inflation that could slip away at any moment.

Markets had anticipated that the RBI would take the decision to hold rates even with the monster of inflation at its neck, and as a result, equity markets dismissed it. However, the position taken by the Central Bank is very worrying as inflation has long been above the range set by the bank and is only expected to rise further when crude oil and commodity prices reach new highs.

Already, the bank’s role as a guardian of the national economy and inflation has been glossed over after it was revealed that the RBI colluded with the Federal Government to let inflation overshoot its target in order to keep low interest rates. This highly questionable decision was taken at the behest of the Ministry of Finance and the government, as it is keen to ensure that India’s economy, which had long been in a downward spiral, since Prime Minister Narendra’s bizarre and ridiculous decision Modi to go for demonetization in 2016.

The struggling economy since had its back broken by another suicidal decision to impose one of the toughest lockdowns that saw India’s GDP collapse by nearly 25% in the first quarter of fiscal 2021 India ended the year with a 7.3pc lower GDP, making it the most affected major economy in the world.

While some semblance of growth has returned to the market, the Indian economy continues to underperform comparable economies around the world, mainly due to faulty policies by the Ministry of Finance which has refused to meet the demand of the economy, keeping its actions focused on the supply side, mainly by reducing corporate taxes and extending credit to certain businesses.

Despite suggestions from leading economists to pump money into people’s pockets to help them buy essentials and thus create demand in the economy, the government has so far refused to pay attention. to these calls. His only aid to the people was 5kg of free grain a month, claiming that was enough to get the economy back on track, even in the face of everyone’s data that more than 130 million Indians had been pushed into extreme poverty and warnings from the United Nations that the 10-year effort to lift nearly 230 million people out of extreme poverty had been undone.

Institutions like the UK charity Oxfam, which monitors inequality, reported that India had seen the biggest rise in inequality during the pandemic, as tens of millions even struggled to feed themselves twice, leading to a huge increase in malnutrition and stunting of children as well as anemia in women. , regions where India already had the dubious privilege of being a world leader, faring even worse than sub-Saharan Africa.

Play with fire

Although the RBI aims to keep inflation below 4%, with a tolerance of 2% more, inflation has hovered around the 6% mark for many months and this year in January and in February, it exceeded the target and the inflation rate was reported at 6.01 and 6.07 pc respectively. With commodity prices, including the price of crude oil as well as grain and fertilizer prices hitting highs not seen since the Russian invasion of Ukraine, consumer prices have also continued to rise throughout the March. The rate of acceleration in the inflation rate has certainly picked up sharply over the past two weeks, with fuel prices rising by more than 15pc, which is sure to have an impact on inflation.

After living months in denial, the RBI finally acknowledged the inflation risk at its MPC meeting on Friday and revised its inflation forecast to 5.7pc for the current financial year from 4.5pc. pc announced in February. The RBI says it expects inflation of 6.3pc in Q1, 5pc in Q2, 5.4pc in Q3 and 5.1pc in Q4.

Although RBI Governor Shaktikanta Das may have been forced to acknowledge the threat of inflation, he again bowed to the wishes of the government by underestimating inflation for the year. With inflation in the first two months of the calendar year already above 6pc, and the following months certainly much higher, one wonders how Das expects inflation for the whole of fiscal year to be 5.7pc, given that April itself would be no less than 6.5pc and the impact of rising fuel and raw material prices has yet to be fully factored in.

Globally, many central banks have hiked rates or warned of several upcoming rate hikes in the current year. The US Federal Bank raised its benchmark rate by 25 basis points to a range of 0.25pc to 0.5pc last month, the first interest rate hike since 2018, while in London the Bank of England raised its rates in March for the third consecutive time, taking the benchmark rate to 0.75 pc. Both banks have acted to rein in inflation and similar examples can be found in most parts of the world, with one or two discordant exceptions.

In many ways, the story unfolding in India is much like the one unfolding in faraway Turkey, where President Recep Erdogan has dismissed talk of inflation and forced his central bank governor to keep rates on hold. interest rates so low that the markets no longer believe the central bank or the government for most of its data. With inflation at 55 pc, the Turkish lira has already lost more than 50 pc in value against the dollar.

Although the INR has depreciated by around 3pc since January 2022, it is still holding strong as market participants, especially foreign institutions, take a wait-and-see approach as to what Das would do next. Whether he follows the dubious example of his Turkish counterpart and continues to live in inflation denial or continues to follow the dictates of his political masters, sacrificing even what little perception remains of the constitutionally guaranteed independence of the RBI , a similar bloodbath, as seen in Istanbul’s financial markets, may well be seen on Dalal Street sooner rather than later.

Leslie M. Gill