RBI announces repo rate by 40 basis points to 4.40%
MSF rate and the Bank Rate to 4.65 per cent.
RBI said, as the war draws on and sanctions and retaliatory actions intensify, shortages, volatility in commodity and financial markets, supply dislocations and, most alarmingly, persistent and spreading inflationary pressures are becoming more acute with every passing day. Debt distress is rising in the developing world amidst capital outflows and currency depreciations. Recent GDP releases suggest that the global economic recovery is losing pace.
By announcing the Decisions and Deliberations of the Monetary Policy Committee (MPC), RBI Governor Shaktikanta Das said, “against this backdrop, the Monetary Policy Committee decided to hold an off-cycle meeting on 2nd and 4th May, 2022 to reassess the evolving inflation-growth dynamics and the impact of the developments after the MPC meeting of April 6-8, 2022.”
Based on this assessment of the macroeconomic situation and the outlook, the MPC voted unanimously to increase the policy repo rate by 40 basis points to 4.40 per cent, with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent.
The
MPC also decided unanimously to remain accommodative while focusing on
withdrawal of accommodation to ensure that inflation remains within the target
going forward, while supporting growth. “I would now like to set out the
rationale behind the MPC’s decision and stance. Globally, inflation is rising
alarmingly and spreading fast.
Geopolitical tensions are ratcheting up inflation to their highest levels in the last 3 to 4 decades in major economies while moderating external demand. Global crude oil prices are ruling above US$ 100 per barrel and remain volatile” said Das.
Global food prices touched a new record in March and have firmed up even further since then. Inflation sensitive items relevant to India such as edible oils are facing shortages due to the conflict in Europe and export bans by key producers.
The jump in fertiliser prices and other input costs has a direct impact on food prices in India.
Further, the normalisation of monetary policy in major advanced economies is now expected to gain pace significantly – both in terms of rate increases and unwinding of quantitative easing as well as rollout of quantitative tightening. These developments would have ominous implications for emerging economies, including India.
Meanwhile, Covid-19 infections and lockdowns in major global production hubs are likely to accentuate global supply chain bottlenecks while depressing growth. In fact, global growth projections have been revised downwards by up to 100 basis points for this calendar year. These dynamics pose upside risks to India’s inflation trajectory set out in the MPC resolution of April 2022.
Further, the MPC noted that domestic economic activity is progressing broadly on the lines anticipated in April. Contact-intensive services are benefitting from pent-up demand and investment activity is showing some signs of gaining traction.
At the same time, the MPC judged that the inflation outlook warrants an appropriate and timely response through resolute and calibrated steps to ensure that the second-round effects of supply side shocks on the economy are contained and long-term inflation expectations are kept firmly anchored. In the MPC’s view, monetary policy response at this juncture would help to preserve macro-financial stability amidst increasing volatility in financial markets.
Accordingly,
the MPC decided to increase the policy repo rate by 40 basis points in its
meeting; it also decided to remain accommodative while focusing on withdrawal
of accommodation to ensure that inflation remains within the target going
forward, while supporting growth.
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