RBI dual rate surge is timely and laudable

The Repo and CRR hike were on the cards considering the extraordinary times we live in. There is a war with no end in sight, there are deep lockdowns in China to deal with very small surges in Covid 19 cases, there is uncertainty in money supply grids and there is selective food shortage with the 2-wheat bowls at loggerheads with each other. “Many simultaneous storms” as the RBI governor very rightly said.

It is an extremely responsible action by the RBI. The fact that they did not wait for June 7 is a clear indication that there is an alert Monetary Policy Committee in place. Three quarters of a 6 % plus inflation will have been the biggest trigger for this sudden move. It takes some astute thinking to increase both the Repo rates (40 BPS) and CRR (50 BPS). This will allow the RBI dual leverage in not only fighting inflation but controlling liquidity. The big take way for me however is the timing of the hike and the extent of the hike. It could be an indication that more hikes could come, the anticipated April inflation numbers could be well past 7 % and the global situation may not improve very soon.

Currently the Indian economy is a lot better than many other leading economies in the world in terms of the macros. However, we do not have many leverages to assure its sustenance for longer periods. The RBI by taking this impromptu action has ensured that high inflation will not derail the growth trajectory. Indian banks presently have Rs 500000 crores of excess liquidity. This will mean the lending costs will go up but the banks borrowing costs will only go up marginally and this arbitrage would also help banks and financial institutions

In India inflation is not money supply led. A rate hike in these situations will not impact capital costs beyond a point and have a direct bearing on investments and spends. The current rate continues to be very much in favour of borrowers. That way the policy is accommodative in its current form.