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Jump in March, April inflation may have forced RBI to do mid-term hike

At the moment, only the rate-cuts of May 22, 2020 have been reversed. If inflation softens due to, say a sudden end to the war, further hikes may not happen so quickly, sources added.

May 05, 2022 / 08:44 PM IST

A day after the surprise rate hike, people familiar with RBI’s thought process say that a likely ugly jump in April CPI may have forced RBI to do the mid-term repo rate and CRR hikes that were announced on Wednesday. The March CPI that was announced on April 13 (a week after the RBI policy) came in at almost 7 percent against market expectations of 6.25 percent. Sources said that regular price data from various mandis and online channels like Bigbasket, may have indicated to RBI that the April CPI would also be higher than the street estimates of around 7.4 percent. External events like the Indonesian palm oil ban would have added to the April CPI. RBI would have had a reasonably clear picture of the April CPI by the end of the month and hence the decision to call an MPC meet on May 2.

These sources said that RBI’s aim, as the governor said, was to withdraw the extra accommodation given for pandemic – the 75 bps rate cut on March 20, 2020 and the 40 bps cut on May 22, 2020. A hike of 115 basis points over June and August policies may be tough for the economy to absorb and hence decision to space them over three policies.

However, these sources caveated that June and August policies are still open and rate hike decisions will be taken on merits and on the basis of fresh data. At the moment, only the rate-cuts of May 22, 2020 have been reversed. If inflation softens due to, say a sudden end to the war, further hikes may not happen so quickly.

Growth Supportive

RBI’s intent is to remain accommodative, since growth needs support, but provided inflation gives it a chance. At the moment, the idea is only “to take away the punchbowl before party gets unruly“, as one source put it. People familiar with RBI also said that the central bank may have acted because the fisc didn’t help as much with fuel excise cuts.


CRR Hike

On CRR hike, these sources say it withdraws only Rs 87,000 crore, out of the over Rs 5 trillion that banks have been depositing in the SDF, or the Special Deposit Facility. Other ways of liquidity withdrawal like through foreign exchange sell-buy swaps have their limits. RBI couldn’t possibly have allowed reserves to fall below $600 billion give current external conditions.

The Fed Push?

The sources also rubbished arguments that RBI was unduly influenced by the expected 50 bps hike from the US Fed. They maintained that RBI’s mid-term policy was influenced more by domestic factors like the possibly high April inflation. However, experts familiar with RBI also said the central bank would have been wary of allowing too wide a differential in real rates versus the US as it can lead to large exodus of dollars. They pointed out that a strong dollar from 1994-2002 had created a series of crises like the Tequila crisis in Mexico in 1994, followed by the Asian FX crisis in 1997, the LTCM and Russian crisis in late nineties. Already Sri Lanka has fallen victim this year and other countries may well follow.

Rate Hikes, Not Sudden

Veteran RBI watchers also pointed out that RBI’s May 4 hikes weren’t as “sudden” as some experts say. The RBI has been withdrawing liquidity, sunsetting pandemic steps since December last year. The April policy in a way prepared the ground for rate hikes by tweaking the stance to “withdrawal of accommodation”. The May 4 announcements need to be seen as a continuum to these previous steps.

On Growth

Sources averred that RBI remains growth supportive and is only removing the froth introduced to counter pandemic woes. The hikes may be negative in the near term but will provide stability for long-term growth. And Indian growth is resilient enough to stomach some hikes. Even India’s lowered 7.2 percent growth compares better with growth rates in China, Korea, US or EU. Urban demand has improved to pre-pandemic levels, exports growth has been in double digits for 14 months and a timely hike may actually goad India Inc into going for capex on the reassurance that RBI is there to curb inflation.
Latha Venkatesh is Executive Editor of CNBC-TV18
first published: May 5, 2022 08:44 pm
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