Earlier rate hike would have impacted economy: RBI Guv

Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday emphatically refuted the perception in certain quarters that it has fallen behind the curve when it comes to monetary policy action, stating had the rates been been hiked three or four months earlier, it would have impacted growth in FY22.

The Monetary Policy Committee (MPC) had upped the policy repo rate in an off-cycle meeting in early May from 4 per cent to 4.40 per cent. Subsequently, earlier this month, this rate was increased from 4.40 per cent to 4.90 per cent.

‘RBI in sync’

“I truly and sincerely believe that the RBI is in sync with the requirements of the economy; and with the trend of economic developments and the process of recovery,” Das said at a BFSI summit organised by a pink publication.

The Governor noted that from September-October 2021 onwards, RBI had focussed on withdrawal of liquidity and it was watching the revival of economic activity and growth. Das emphasised that on top of a 40 basis points (bps) rate hike through the Standing Deposit Facility (SDF rate: 3.75 per cent), the MPC did not want to add another 40 or 50 bps hike in the April policy because the shock would have been too much.

MPC had a calibrated path (for rate hikes) and therefore, it held an off-cycle meeting in May. Now, the growth number for FY22 is about 1.5 per cent higher than the pre-pandemic FY20 levels.

“So, the RBI has acted proactively. And, I would not agree with any perception or any sort of description that the RBI has fallen behind the curve. Just imagine if we had started increasing the rates early, what would have happened to growth in FY22? Rhetorically, could it have prevented the spike in inflation which has now been caused by the war? No, inflation would still be at 7 per cent,” Das said.

Targetting soft landing

To a specific question whether exiting the accommodation provided during the Covid period is proving to be more difficult than he had imagined earlier, the Governor observed that the process has taken a little longer because of developments like the various waves of the pandemic and the onset of war in Europe.

“... There is ₹7-lakh crore sitting out there. Now, this too has come down to about ₹5-lakh crore. And most of this liquidity is getting absorbed in SDF and variable rate reverse repo,” Das said., while also noting that RBI has to leave something in the market also, with which the lenders have to carry on with their activities.

Das noted that the process of getting out of the accommodation has taken a little longer because of things beyond RBI’s control. Even at this point of time, RBI remains confident that it will come out of accommodation very smoothly and it is targetting a soft landing.

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