This would have reassured the RBI that its 2.5 percent rate increases over the previous year are having a delayed impact on performance. However, two new variables may hinder the implementation of monetary policy and make it challenging for the RBI to reduce inflation to its target rate of 4%.
Source: The Hindu
New bank deposits of Rs 1.5 trillion have been made as a result of the removal of Rs 2000 currency notes from circulation. There is evidence to support the idea that a spike in bank deposits may cause credit growth to increase in succeeding periods. It is necessary to prevent the inflationary effects of this liquidity boom. In order to raise liquidity, the RBI has turned to variable rate reverse repo operations.
The RBI also stated in its most recent policy that it will continue to reduce accommodation, which might be seen as a moderately hawkish tone. Second, it’s still uncertain how the monsoon will affect things.
The South-West Monsoon is a week late, despite the fact that the India Meteorological Department (IMD) announced its arrival at the same time that the RBI Governor announced the monetary policy. Due to its slow growth, the winter crop’s prospects may suffer, and the RBI has stated that food price dynamics will determine the trend of inflation. Clearly, inflation is subject to upside risks.
The quarterly predictions suggest that prices will harden over the coming quarters, especially when the advantage of a low base wears out in the third quarter, and the RBI has forecasted a CPI inflation rate of 5.1 percent for 2023u20132024. One would typically anticipate the RBI to increase the repo rate when the inflation rate drifts further away from the 4 percent objective. However, we have seen that the RBI has been attentive to the demands of the economy’s growth ever since the Covid-19 epidemic.
The excellent performance of high frequency measures of urban demand, such as sales of four-wheelers, air passenger traffic, and consumer credit, is what is driving the monetary policy statement’s confidence about growth. Poor sales of tractors and two-wheelers, as well as stagnant income and employment growth in rural areas, are indications that rural demand has been weak.
Source: CNBC- TV 18
Therefore, the central bank will continue to mop up liquidity from the system to guarantee that the previous rises and tighter liquidity conditions prevent lending rates from dropping as a result of the RBI’s rate halt and withdrawal of accommodation.
The RBI is hesitant to raise the repo rate in order to achieve the ideal, even if the governor has referenced Mahatma Gandhi to suggest that the ideal must not be lowered in respect to the 4 percent inflation objective. Despite continuing to be worried about inflation, it appears that the RBI does not want to forgo growth in order to achieve its inflation mission.
What do you think about this? Comment below.
