Published on Jun 7, 2018
EDITORIAL

As inflationary trends harden, the RBI’s rate hike will quell uncertainty in the markets

At the end of an unusually long three-day meeting, the Monetary Policy Committee of the Reserve Bank of India opted for a hike in key interest rates by 25 basis points — the first such increase in four and a half years. This hike, the first during this NDA government’s tenure, was approved unanimously by the six-member committee, citing worries about hardening inflation trends and a firming up of growth recovery at home. Global uncertainties affecting emerging markets in particular have played a role as well — be it rising tensions over trade wars initiated by the Donald Trump administration or the strengthening dollar or further rate hikes by the Federal Reserve that could strengthen the exodus of global capital from emerging markets such as India. Already, between January and May, outflows from foreign portfolio investors have reached their highest level in 10 years, and by June 4, $6.7 billion was pulled out on a net basis from the domestic capital market. The rupee, along with other emerging market currencies, is hurting too, but RBI Governor Urjit Patel dismissed suggestions that the rate hike was a bid to stem outflows. The MPC, he asserted, is driven purely by its inflation management mandate, and there is no contradiction between the rate hike and the committee sticking to its neutral policy stance.

To be sure, while retaining its growth projections for 2018-19 at 7.4%, the MPC has revised upwards its inflation projections for the year since its April meeting — from 4.7-5.1% in the first half and 4.4% in the second half to 4.8-4.9% and a significantly higher 4.7%, respectively. This should worry a government gearing for parliamentary elections next year. Though seasonal food inflation spikes are delayed, input cost pressures have hardened owing to a spurt in global commodity prices, led by fuel. Moreover, inflationary expectations among producers as well as consumers have gathered steam. Crude oil prices have been the biggest factor at play, rising 12% from $66 a barrel when the MPC met in April to $74 a barrel. The committee said this rise is “sharper, earlier than expected and seems to be durable”, and termed it a major upside risk to its earlier inflation projections. Industry has expressed concern, but effective borrowing rates and bond yields had been firming up even before this rate hike. The government has, surprisingly, welcomed the RBI’s stance as one that could help steady the markets and dampen uncertainties. The RBI’s neutral stance, as Mr. Patel pointed out, allows it to keep all options open. But a reversal in rates is unlikely till global headwinds clear up and the mandarins in New Delhi work out a viable strategy to minimise the inflation transmission from global oil prices that is exacerbated by their taxation policy for fuels.

  1. pre-emptive (adjective) – preventive, precautionary, protective.
  2. inflationary (adjective) – tending to cause monetary inflation.
  3. inflation (noun) – increase of price level of goods & services & vice versa decrease of currency value.
  4. repo rate (noun) – it is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds.
  5. quell (verb) – abolish, terminate, demolish/thwart.
  6. tenure (noun) – incumbency, term of office, period/time in office.
  7. unanimously (adverb) – without opposition, agreed to by everyone involved.
  8. firming up (noun) – an act of strengthening, increasing, bolstering.
  9. Federal Reserve System (US) (noun) – the central banking system of the United States (The Reserve Bank of India (RBI) is India’s central banking institution).
  10. exodus (noun) – mass departure, evacuation, leaving/exit.
  11. capital outflow (noun) – money/assets flowing out of (or leaving) a particular country’s economy.
  12. capital inflow (noun) – a steady movement of capital (amount) into a place, economy, activity etc.
  13. portfolio (noun) – investments, shares, bonds.
  14. pull out (phrasal verb) – withdraw, leave,  get out.
  15. stem (verb) – restrict, control; slow/reduce.
  16. spurt (noun) – a sudden burst, increase of activity.
  17. steam (noun) – momentum, impetus, strength/energy.
  18. at play (phrase) – something active that affects a result.
  19. bond yield (noun) – bond yield  is the annualized percentage return that an investor will obtain from buying a bond. In general, the yield of a bond is inversely proportional to its price. This means that as the yield increases, the price decreases (and vice versa).
  20. dampen (verb) – decrease, reduce, lower.
  21. headwinds (noun) – (in business) situations or conditions that make growth harder/difficult. Tailwinds (noun) – (in business) it describes a situation or condition that will move growth, revenues, or profits higher.
  22. mandarin (noun) – a powerful officer, civil servant, functionary/bureaucrat.
  23. exacerbate (verb) – aggravate, make worse/worsen, compound.
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