<p>It was wisdom come late for the RBI’s Monetary Policy Committee when it took a surprise decision to raise the repo rate from 4% to 4.4% in an off-cycle meeting on Wednesday. The RBI has also increased the Cash Reserve Ratio (CRR) maintained by banks by half a percentage point to 4.5%. This is expected to reduce about Rs 87,000 crore of liquidity. It is the first increase in the repo rate since August 2018. The decisions surprised the markets, though it has been clear for some time that the RBI would be forced to change its stance and go in for rate hikes. Even as recently as April 7, it had refused the see the red writing on the economy’s wall which has been there for about two years, maintaining that the price pressures were transitory, and that growth had to be prioritised. Persistent high inflation and the US Federal Reserve’s imminent move to raise interest rates finally forced RBI’s hand.</p>.<p><strong>Also Read | <a href="https://www.deccanherald.com/business/business-news/rbi-failed-in-convincing-govt-for-supply-side-measures-to-fight-inflation-will-work-alone-now-1106775.html" target="_blank">RBI failed in convincing govt for supply-side measures to fight inflation, will work alone now</a></strong></p>.<p>RBI Governor Shaktikanta Das said that “persistent and spreading inflationary pressures are becoming more acute with every passing day,” and so the MPC had decided to respond to “ensure that effects of supply-side shocks on the economy are contained”. The Governor has noted the impact of the Russia-Ukraine conflict as the immediate event that disrupted the supply chains and led to the increase in prices. But there were reasons for adopting a policy to fight inflation even before the conflict. The Consumer Price Index-based inflation has been rising for months. The average rate for the last 24 months has been 5.8%, which is close to the line of concern. In March, it was 6.95%, well above the RBI’s tolerance level. The April number is likely to be higher. But the RBI underestimated the situation, and inflation always ran ahead of its forecasts. It should also be noted that central banks in other countries started policy corrections to fight inflation some months ago. </p>.<p>The RBI’s expectations for the coming months and quarters have not been disclosed. But it is certain that inflation is set to get worse. Food prices are on the upswing and core inflation remains elevated. Global commodity prices are high and still rising. So, the policy action will continue and more can be expected. There is still a lot of liquidity in the economy and the repo rate is still another 75 basis points below the pre-pandemic level. Even as the RBI has started acting now, it will not be able to rein in inflation on its own. The government will have to act by taking steps like cutting the taxes on petroleum products which contribute to the spike in inflation in a major way. </p>
<p>It was wisdom come late for the RBI’s Monetary Policy Committee when it took a surprise decision to raise the repo rate from 4% to 4.4% in an off-cycle meeting on Wednesday. The RBI has also increased the Cash Reserve Ratio (CRR) maintained by banks by half a percentage point to 4.5%. This is expected to reduce about Rs 87,000 crore of liquidity. It is the first increase in the repo rate since August 2018. The decisions surprised the markets, though it has been clear for some time that the RBI would be forced to change its stance and go in for rate hikes. Even as recently as April 7, it had refused the see the red writing on the economy’s wall which has been there for about two years, maintaining that the price pressures were transitory, and that growth had to be prioritised. Persistent high inflation and the US Federal Reserve’s imminent move to raise interest rates finally forced RBI’s hand.</p>.<p><strong>Also Read | <a href="https://www.deccanherald.com/business/business-news/rbi-failed-in-convincing-govt-for-supply-side-measures-to-fight-inflation-will-work-alone-now-1106775.html" target="_blank">RBI failed in convincing govt for supply-side measures to fight inflation, will work alone now</a></strong></p>.<p>RBI Governor Shaktikanta Das said that “persistent and spreading inflationary pressures are becoming more acute with every passing day,” and so the MPC had decided to respond to “ensure that effects of supply-side shocks on the economy are contained”. The Governor has noted the impact of the Russia-Ukraine conflict as the immediate event that disrupted the supply chains and led to the increase in prices. But there were reasons for adopting a policy to fight inflation even before the conflict. The Consumer Price Index-based inflation has been rising for months. The average rate for the last 24 months has been 5.8%, which is close to the line of concern. In March, it was 6.95%, well above the RBI’s tolerance level. The April number is likely to be higher. But the RBI underestimated the situation, and inflation always ran ahead of its forecasts. It should also be noted that central banks in other countries started policy corrections to fight inflation some months ago. </p>.<p>The RBI’s expectations for the coming months and quarters have not been disclosed. But it is certain that inflation is set to get worse. Food prices are on the upswing and core inflation remains elevated. Global commodity prices are high and still rising. So, the policy action will continue and more can be expected. There is still a lot of liquidity in the economy and the repo rate is still another 75 basis points below the pre-pandemic level. Even as the RBI has started acting now, it will not be able to rein in inflation on its own. The government will have to act by taking steps like cutting the taxes on petroleum products which contribute to the spike in inflation in a major way. </p>