RBI Finds A Way To Make The Best Of A Bad Circumstance

On May 4, the Reserve Bank‘s Monetary Policy Committee (MPC) launched a robust anti-inflation campaign. The participants agree overwhelmingly to boost the average repo rate to 4.4 per cent, an increase of 0.4 per cent over the previous move of 0.25 basis points.

The MPC was widely expected to hike the repo rate at its planned meeting in mid – June 2022.

Furthermore, institutions’ cash reserve ratio (CRR) was increased by 0.5 basis points to 4.5 per cent. From May 21, the system would be drained of Rs 87,000 crores.

Reason Why Such A Risky Step Taken By RBI

First, some additional info. In mid-July 2016, India made two significant adjustments to its monetary management mechanism. One was the establishment of variable inflation targeting regime with the primary goal of controlling household inflation and keeping it stabilized at 4% with such a +/-2% specified tolerance along either side.

India used to strive to manage a variety of indices, including development, supply of money, bank lending, as well as other measures. The move to price stability was intended to make the policy goal more precise. A lot of contemporary financial institutions are now aiming toward inflation.

Another significant reform was the formation of the MPC, which consists of six individuals, three from the RBI & 3 from outside specialists. This was supposed to empower the policymaking process by allowing each person to vote individually on whether to keep or adjust the policy interest rate, which has become the repo rate.

The repo rate, also known as the buyback rate, is the rate at that banks borrow money from the RBI when they need them. The MPC is required to convene per two months on a fixed schedule.

Given that the MPC met as little as a month ago in early April, this off-cycle meeting came as a great shock. A thorough report outlining the RBI’s estimates and predictions for 2022-23 was also published at the April session.

The Argument For Accurate Timing

The immediate issue was undoubtedly continued inflation. But what happened to inflation projections during early April and the end of April? One was the real consumer price index (CPI) rate of inflation of 6.95 per cent in March 2022, which was considerably higher than the experts’ projection of 6.35 per cent. The causes of this rampant inflation were equally widespread, implying that another rise was inevitable.

The Case For The Decisions Made

Even though the RBI has indeed been able to act by acquiring dollars to safeguard the rupee, given the substantial forex reserves it has built up through prior direct investment (just around $ 600 billion presently). In approximately the last few months, the RBI has issued over $20 billion in bonds. However, given the resources, there is indeed a limit.