RBI rate hikes to contain price rise; inflation to fall below 6% next year

On Wednesday, member Ashima Goyal of the RBI Monetary Policy Committee (MPC) said that the central bank’s efforts to curb price appreciation by repeatedly raising interest rates would help curb inflation, which likely to fall below 6% next year.

Goyal said the rate hike has largely reversed the pandemic-duration cuts but the real rate remains low enough not to affect the growth recovery.

She told PTI news agency: “With a two-quarter lag of two-quarters, a higher real exchange rate will reduce demand in the economy. International commodity prices are falling due to the global recession and congestion. supply chain congestion has decreased”.

Reserve Bank of India raised the short-term lending rate for the third time in a row by 50 bps to bring the repo rate to 5.9%, on September 30. Since May, it has increased the base rate accumulation by 190 points .

“The Indian government is also taking action to reduce inflation from the supply side. Current projections suggest inflation will fall below 6% next year,” Goyal said.

The central bank is tasked with keeping inflationary at 4% with a margin of 2% on either side.

According to Goyal, a mildly positive real interest rate could act to reduce inflation, with supply-side support, while imposing minimal growth sacrifice.

She noted that today future real interest rates are positive, and such a rapid response in inflation targeting to excess inflation helps to stabilize inflation expectations.

India’s Consumer Price Index (CPI) September-based inflation rose to a five-month high of 7.41%, still above the upper limit of the RBI’s inflation targeting framework for the ninth consecutive month.

In response to a question about India’s rupee hitting historic lows, Goyal pointed out that a more depreciation of the rupee makes imports more expensive and hurts those who have borrowed abroad but can boost profits. profits for some exporters.

While commenting that lower imports and higher exports can help reduce the current account deficit, she said the dollar is strengthening against all currencies as the Fed raises interest rates to attract capital. back to America.

“But INR devaluation is less than in most other advanced and emerging markets, and equity inflows have returned recently,” she said, adding that because INR is market-determined , this means the markets are covering India’s better outlook and lower inflation.

Noting that Indian share prices have fallen less than in other countries, which shows the market’s confidence in India, she said foreign exchange reserves have fallen mainly due to the impact of valuation.

Recently, Finance Minister Nirmala Sitharaman said the rupee has not weakened but the dollar has strengthened, as she defended the Indian currency’s 8% slide against the greenback this year.

The rupee on Wednesday fell below 83 against the US dollar for the first time as foreign capital outflows.

In response to the question of global recession fears, Goyal suggested that a global recession would negatively affect a connected India.

“But India has a large domestic market. The size, diversity, policy space and strength of the financial sector will continue to provide the country with positive growth,” she said.

Goyal points out that companies have reduced their debt over the past decade and that the financial sector is well capitalized. “All of this reduces the risk of infection for India,” she said.

IMF Director Kristalina Georgieva recently said that the global economy is moving from a relatively predictable world to a more uncertain one.

The World Bank on October 6 forecast a 6.5% growth rate for the Indian economy between 2022-23, down one percentage point from its June 2022 forecast, citing the environment. The international market is deteriorating, while the IMF forecasts a growth rate of 6.8% in 2022 compared to 8.7% in 2021 for India.

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