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RBI in favor of easy policy steps, gradual increase in repo rate: Sources

Mumbai, May 5 (PTI) The Reserve Bank of India (RBI) may have abruptly hiked the policy interest rate with a view to curb rising inflation, but it is in favor of a easing monetary policy move and a small rate cut. Wants to make small increases.

A source familiar with the current policy stance of the RBI said on Thursday that the central bank was left with no option but to take a sudden step. The rise in inflation following Russia’s attack on Ukraine is bound to have an impact on Indonesia’s recent ban on palm oil exports, he said.

“The thinking is a spontaneous policy response, not a large-scale one,” the source said in favor of small steps rather than big changes by the RBI.

The RBI on Wednesday surprised everyone by announcing a sudden hike in the policy repo rate by 0.40 per cent without any specific schedule. The central bank attributed this to the continuous increase in inflation as a major reason.

Asked what has changed between the last policy review meeting held on April 8 and the rate hike on May 4, the source said inflation at 7 per cent in March was higher than the Reserve Bank’s estimates and the trend continued. It was expected to persist in April as well.

In the two years of the Kovid pandemic, the RBI had focused on growth rather than inflation, but now its priority has changed. However, instead of making large-scale changes, the Reserve Bank wants to move slowly.

The source said that if the policy interest rate had been hiked sharply, it would have had a strong impact on the economy. A gradual increase in interest rates will only help the economy in the medium and long term.

According to it, the Ukraine war alone has forced the RBI to increase its inflation forecast by 1.20 per cent and reduce its GDP estimates by 0.60 per cent.

“As long as the fighting continues and is expected to last for six months or a year, it looks like the inflationary pressures caused by the war will continue,” the source said.

It said ideally this growth would have nothing to do with the monetary review meeting to be held in June, but if inflation continues to be very high, it will be dealt with according to the circumstances.

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