Shortages, volatility in markets more acute; global economic recovery losing pace: RBI Guv

RBI Governor Shaktikanta Das (File image: Reuters)

The shortages and volatility in financial and commodity markets are becoming "more acute", and the "global economic recovery is losing pace", Reserve Bank of India (RBI) Governor Shaktikanta Das said on May 4, as he announced a surprise 40 basis points hike in repo rate.

Crude oil prices "will continue to remain high" in the near future, Das said in his announcement, adding that food inflation is "also expected to continue".

In order to contain the inflationary pressures, the Monetary Policy Committee (MPC) has unanimously voted to increase the repo rate to 4.40 percent, added Das.

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The panel has also revised the standing deposit facility (SDF) to 4.15 percent and marginal standing facility (MSF) to 4.65 percent, Das noted, further stating that "CPI inflation print for April is also expected to be elevated".

"Nine out of the 12 food subgroups registered an increase in inflation in the month of March. High-frequency price indicators for April indicate the persistence of food price pressures," the RBI Governor said.

The central bank, Das said, will be using "conventional and unconventional tools" to support growth amidst the challenging period. "It has been decided to increase Cash Reserve Ratio (CRR) by 50 basis points to 4.5 percent for net demand and time liabilities effective from the fortnight beginning 21st May 2022."

Withdrawal of liquidity through this increase in the CRR would be of the order of Rs 87,000 crore, he added.

The unscheduled announcement from Das comes days after the RBI hinted at gradual withdrawal from the easy money regime. The MPC has been on a prolonged accommodative stance to support growth, and had reduced repo rate by 250 points since February 2019.

“The decision today to raise repo rate may be seen as reversal of rate action of May 2020. In last month, we had set out a stance of withdrawal of accommodation. Today’s action need to be seen in line with that action," Das said.

The increase in repo rate, and the decision to modulate the liquidity conditions in line with the policy action is aimed at achieving the medium-term target of keeping consumer price index inflation at four percent, with an upper and lower bracket of two percent.

The inflation rate had peaked to 6.95 percent in March, which was significantly above the market estimate of 6.35 percent and the highest since October 2020.

The economic challenges have been triggered by the outbreak of Russia-Ukraine war in February, which has severely stressed the commodity supplies and led to volatility in financial markets worldwide.

The RBI Governor, however, noted that India's external sector has "remained resilient" amidst formidable headwinds.

Provisional data suggest that India's merchandise exports remain strong in April this year and services exports reached a new height in March 2022," he said, adding that the external debt to GDP ratio also "remains low at 20 percent".

Potential market opportunities have opened due to geopolitical conditions and the recent trade agreements and a few more trade agreements are also expected to materialise in the coming months, Das further noted.