Policy rate hike to control inflation, 50bps the new normal with many central banks: RBI Governor
With the inflation at an unacceptable 7 per cent, the monetary policy has to act and hence the repo rate has been hiked by 50 basis points (bps) to 5.40 per cent, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday.
image for illustrative purpose
Chennai, Aug 5 With the inflation at an unacceptable 7 per cent, the monetary policy has to act and hence the repo rate has been hiked by 50 basis points (bps) to 5.40 per cent, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday.
ting the policy rate hikes by the central banks of several other countries Das said 50 bps is the new normal. Others have also hiked by 75-100 bps.
The policy or the repo rate is the interest rate at which the RBI lends short-term funds to commercial banks. The RBI hikes the rate generally during an inflationary time to curtail liquidity in the economy.
According to Das, the overall liquidity in the system is upwards of Rs 5 lakh crore touching Rs 6 lakh crore.
Das said the RBI's Monetary Policy Committee (MPC) takes a calibrated view of aspects like growth, demand and makes a balanced call in terms of rate hike.
According to him, MPC's action is to target and reign in inflation.
The decision to increase the policy rate is in consonance with the objective of achieving the medium term target for consumer price index (CPI) inflation of 4 per cent within a band of about 2 per cent, while supporting growth, the RBI said.
According to the Governor, the inflation in India is largely due to issues like geopolitical developments, Russia's war against Ukraine, supply chain disruptions.
India did not resort to any financial action like many other countries resulting in demand pull inflation, he added.
Das also said the impact of the rate actions will take about six months to know.
When queried about the resultant hike in interest rates on deposits by the banks Deputy Governor M.D. Patra said commercial banks were now on deposit mobilisation drive by increasing the interest rates.
Adding to that Das said commercial banks cannot rely on the central banks for funds.
Terming that the current account deficit is at a sustainable level and declining to give a forecast on the current account deficit, Das said the RBI had studied taking into account various scenarios.
According to Patra, the current account deficit for a year cannot be estimated based on a month's international merchandise trade data.
Stating that India will be impacted by geopolitical developments, Das said the world is getting fragmented in terms of trade and other aspects and it is no more a flat world.
The RBI Governor also said the developments in Taiwan, US-China standoff, will not have any impact on India as India's trade with the island is very small.
Queried about the impact of RBI's action in increasing foreign exchange inflows, Das said the Boards of commercial banks are taking necessary actions and the result will be known later.
On RBI allowing digital banks, he said the central bank is studying the issue and will soon come out with norms for digital lending.
