As expected by all, the Reserve Bank of India has increased its lending rate by 25 basis points or 0.25 per cent to 6.50 per cent — the sixth straight increase in interest rates since May last year taking the cumulative hike to 2.5 per cent.
Though analysts expected this would be the final rate hike in the monetary tightening cycle, a cautious RBI kept the door open to more tightening, stating that core inflation remained high.
Noting that inflation was eased due to strong deflation in vegetables, which may dissipate with the summer season uptick, the central bank observed that inflation — excluding vegetables — has been rising well above the upper tolerance band. The RBI observed that inflation, therefore, remains a major risk to the outlook as it felt that the ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation.
The central bank is also worried about the impact of the easing of Covid-related mobility restrictions in countries like China on commodity prices and the ripple-effect of geopolitical developments on crude oil prices.
Currently, the price of Indian crude oil basket hovers around $95 per barrel even after buying oil from sanctions-hit Russia at lowest prices. Saudi Arabia has already increased its oil prices for Asian countries and any worsening of conflicts could be send global oil prices soaring.
The statement issued by the RBI-led Monetary Policy Committee on Wednesday shows that it prefers to tame inflation through monetary tightening rather than fuelling the economic growth by adopting accommodative monetary policy. The financial policy — as stated in finance minister Nirmala Sitharaman’s Union Budget 2023 — too reflects cautious approach, which is directed at keeping fiscal deficit in control, even if it means a lower economic growth.
While the benefits of the economic growth take time to reach the poor, higher prices would hit the poor’s family immediately. As such, he Narendra Modi government appears to be keen on keeping prices under control in the election year to keep the poor, who make the most of the voters, happy. Job-seekers may, perhaps, still have to bide for their good time.
