RBI's Unanticipated MPC Meeting & Sudden Price Hikes: BIG SURPRISE!
| S Kumar Saha, Business Editor, IOP, Mumbai - 13 May 2022


RBI's Unanticipated MPC meeting might have sent this message to markets- Hikes in price in every sector from Repo rate to SDF rate to MSF rate and CRR hikes are very surprising moves!!

By S. Kumar

New Delhi, May 13, 2022

The slowdown will impact economic growth; inflation could cross an all-time high, which will douse the fire!!

I remember the headline quote from an opera show- 3 Idiots! The banking sector is just stepping out of the silent period. Year-ending, as well as 1st quarter results of this FY, are about to be featured for public view. The element of surprise that roiled markets was RBI's timing of the announcement. Overall, hikes were expected from its April MPC review. At that time, RBI had introduced the standing deposit facility as the new floor of the liquidity adjustment corridor was 40 bps, higher than RRR, and restored the policy to its pre-pandemic 50bps. The RBI Governor has chosen the beginning of May when most of the country is suffering from scorching heat and rising prices for household goods, commodities, fuel, real estate, gold, and so on!Das Saheb, will you please reveal what is pakking in your mind or you may describe it as ' I hear, I know, I see, I remember, I do, I understand'. In these suddenly called MPC meetings, members could've served seasonal fruits like Hapus Mangos, Jackfruits, Grapes, etc, instead of Garam Chai- pakoda or snacks!


On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its uncertain meeting on May 4, 2022, decided to: Increase the policy repo rate under the liquidity adjustment facility (LAF) by 40 basis points to 4.40 percent with immediate effect. As a result, the SDF rate is reduced to 4.15 percent, the MSF rate is reduced to 4.65 percent, and the bank rate is reduced to 4.65 percent.The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth. These decisions are consistent with the goal of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a + or -2% band while supporting growth. The main considerations underlying the decision are set out in the analysis below:

Impact on Domestic and Global Economy:

  1. A) Domestic economic activity stabilized in March-April as the third wave of COVID-19 faded and restrictions were eased. Urban demand appears to have maintained expansion, but some weakness persists in rural demand. Investment activity seems to be gaining traction. Merchandise exports recorded a double-digit expansion for the fourteenth consecutive month in April. Non-oil and non-gold imports also grew robustly on the back of improving domestic demand. *In March 2022, headline CPI inflation rose to 7.0 percent from 6.1 percent in February, owing largely to geopolitical spillovers. Food inflation increased by 154 basis points to 7.5%, while core inflation increased by 54 basis points to 6.4%.The rapid rise in inflation is occurring in an environment in which inflationary pressures are broadening across the world. *According to the IMF, inflation in advanced economies will rise by 2.6 percentage points to 5.7 percent in 2022, while in emerging markets and developing economies it will rise by 2.8 percentage points to 8.7 percent. Overall, system liquidity remained significantly higher. As of April 22, 2022, bank credit had increased by 11.1 percent year on year.India’s foreign exchange reserves declined by US $6.9 billion in 2022-23 (up to April 22) to US $600.4 billion.
  1. B) Since the MPC’s meeting in April 2022, disruptions, shortages, and escalating prices induced by the geopolitical tensions and sanctions have persisted, and downside risks have increased. The International Monetary Fund (IMF) cut its forecast for global output growth in 2022 by 0.8 percentage points, to 3.6 percent, in less than three months.The World Trade Organization has scaled down the its projection of world trade growth for 2022 by 1.7 percentage points, to 3.0 percent.

Key factors:

1) Against this background, the MPC is of the view that while economic activity is navigating the vortex of forces confronting the world with resilience on the strength of underlying fundamentals and buffers, the risks to the near-term inflation outlook are rapidly materializing, as reflected in the inflation print for March and the developments thereafter. In this milieu, the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second-round effects. Accordingly, the MPC decided to increase the policy repo rate by 40 basis points to 4.40 percent. The MPC also decided to remain accommodative while focusing on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

2) Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent on the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation-sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries. International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects. Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from the prices of essential medicines. Renewed lockdowns and supply chain disruptions due to the resurgence of COVID-19 infections in major economies could sustain higher logistics costs for longer. All these factors pose significant upside risks to the inflation trajectory set out in the April statement of the MPC.

3) As regards the outlook for domestic economic activity, the forecast of a normal southwest monsoon brightens the prospects for Kharif production. The recovery in contact-intensive services is expected to be sustained, with the ebbing of the third wave and growing vaccination coverage. Investment activity should get an uplift from robust government capes, improving capacity utilization, stronger corporate balance sheets, and congenial financial conditions. On the other hand, the worsening external environment, elevated commodity prices, and persistent supply bottlenecks pose formidable headwinds, along with volatility spillovers from monetary policy normalization in advanced economies. On balance, the Indian economy appears capable of weathering the deterioration in geopolitical conditions, but it is prudent to continuously monitor the balance of risks.

Risks include escalation of Russia's invasion of Ukraine, financial instability triggered by the US Fed’s aggressive tightening, the emergence of more lethal COVID-19 variants, and disruptions associated with China's current outbreaks.          

Das Saheb, the bureaucrat turned governor, you have already been rewarded. You got another term for three years. Your records are unbreakable. Neither you nor your predecessors have a record of what you have done for the government since its inception, but will you ever care about the common market? Common people? A price line, please! Oh! Come on! No time, no need! Oye lucky oye, I am already in favor of a democratically elected people's representative in the headquarters of the country. Let them think about it, I don’t want to be a poster boy! Good enough, sir. Immediate after the UP polls, not only were fuel and LPG prices hiked several times, but small savings rates were also cut just a day after the final phase of the election-policy rates also could’ve held steady till next year. Saheb, if I don’t look back very far, you are making headlines by avoiding a ‘rate hike', but the Central Bank has been indulging in stealth hikes for the last two years, even after the immediate effect of pandemics. We are witnessing ‘cats drinking milk with closed eyes, thinking no one is looking at it. In your last four years as Governor Saheb, you're all magic words, all accommodative, accumulatively calibrated-in focus on growth can be remembered. Without a doubt, you are an excellent political economist; otherwise, why are you obligated to act quickly? Is the time for something else running out or are you sensing/reading the minds of politicians that if you don’t tighten rates now but later that will impact the market before the general election in 2024? Savers are far outstripping borrowers, in an economy where the biggest beneficiaries of low-interest rates are top-rated corporates. After gaining from lower taxes, they have continuously lowered fund costs through refinancing. The Central Bank baffled everyone with its timing of this unscheduled hush-hush meeting, which was due next month, and by going ahead with a sharp hike in key policy rates (by 40bps) and mopping up liquidity from the money market by increasing the cash which banks have to maintain as a reserve by 50bps. Now, let's see the effects:

This hike spells bad news for existing borrowers as banks and other financial institutions will soon start increasing interest rates on loans, which in turn means that the loan EMIs will also go up. Especially for consumers, personal and auto loans will suffer greatly. Home loan EMIs will also rise. Financial institutions will increase their ROI for new borrowers. India INC will raise interest costs for companies. Some companies will cut down on investment. Financials, autos and real estate will be hit the hardest. While debt investment may become attractive, debt funds will see a drop in Net Asset Value as bond prices will fall, and higher interest rates are negative for equities. The RBI Governor said that the hike in CRR (Cash Reserve Ratio) was to ensure liquidity conditions are ‘modulated in line with the policy action’. Average surplus liquidity in the banking system reflected in total absorption through SDF and VRRR (variable rate) auctions amounted to Rs. 7.5 lakh crore in the 8-29th Aril ’22. Here, the Governor explained that ‘the large liquidity overhangs in the form of daily surplus funds perked under the SDF (Standing Deposit Facility) has resulted in the weighted average call money rate-the operating target of monetary policy-dipping below the SDF rate’, but experts say otherwise.

Hence, all eyes are looking forward to the June MPC meeting to come out. Perhaps a 75 basis point may increase. 

(The writer is a Senior Economic Journalist and political critic! The views expressed in this article are his personal.)

Image Courtesy:

Pic 1 Shri Shaktikant Das, Governor, RBI, Courtesy - PIB< Kerala

Pic 2: Shri Shaktikant Das, Governor, RBI with Finance Minister Nirmala Sitharaman Courtesy - Twitter Handle of FinMinIndia

3 : The Western Producer


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