RBI's criticism for off-cycle MPC rate hike unfair, says former governor Subbarao

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The criticism of the RBI’s rate-setting Monetary Policy Committee for opting an off-cycle repo rate hike is “unfair”, given the uncertainty around inflation in the country, Duvvuri Subbarao. a former governor of the Reserve Bank of India, has said.

“By acting pre-emptively, the RBI hopes to keep inflation expectations anchored,” Subbarao said in an article he wrote for Moneycontrol on May 10. “The RBI must have also calculated that waiting out till June will be costly while an off-cycle action will give it more bang for the buck.”

In an unscheduled announcement on May 4, the MPC announced a 40-basis-point hike in the key lending repo rate and raised the cash reserve ratio (CRR) by 50 basis points.

The move came in the backdrop of aggressive monetary tightening by the US Federal Reserve and the domestic retail inflation persistently staying above the central bank’s comfort zone. It was the first such unscheduled statement from the RBI governor since the start of the coronavirus pandemic in 2020. The MPC was scheduled to meet in June.

Repo is the rate at which the central bank lends short-term funds to banks. The RBI had cut the repo rate by 250 basis points since February 2019 to help revive growth in a COVID-hit economy.

The off-cycle announcement surprised the markets, pushing up bond yields. Analysts questioned the timing of the hike and the rationale.

Subbarao said that it was “unfair” to expect central banks to anticipate the future more accurately. Even though the Russia-Ukraine war was on for a few weeks, even seasoned military experts and experienced diplomats were “wrongfooted” in predicting its course, the former RBI governor said.

According to Subbarao, the biggest onslaught on inflation came from the spike in global prices of fuel, food and other commodities triggered by the war. Further, supply chain disruptions because of lockdowns in China, the pace of policy normalisation in advanced economies and the chances of a hard landing of the US economy could adversely impact economies, he said.

India's retail inflation jumped to a 17-month high of 6.95 percent in March, staying above the upper band of the central bank’s target for the third consecutive month.

Inflation print for April is also expected to come above 7 percent, according to economists. Under the current regime, the RBI targets inflation at 4 percent with a tolerance level of two percentage points on either side.

“Those who think that the RBI was behind the curve must note this. The RBI is acting in real time within the universe of knowledge available at the time whereas critics are commenting with the benefit of hindsight!,” the former RBI governor said.​