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Monetary Policy Committee Members Divided On Issue Of Further Rate Hike

Members of RBI’s Monetary Policy Committee (MPC) seem to be divided on whether the Reserve Bank of India should go ahead with increasing the interest rate in May-June 2022

Members of the Monetary Policy Committee (MPC) are split on whether the Reserve Bank of India (RBI) should raise interest rates in May-June 2022.

The members of the Monetary Policy Committee (MPC) seem to be divided on whether the Reserve Bank of India (RBI) should go ahead with increasing the interest rate in May-June 2022.

For a few days now, speculations have been rife that the RBI could increase the interest rate. India’s largest bank, the State Bank of India (SBI) had also in its Ecowrap report mentioned that the RBI is likely to hike the repo rate in its June and August policy.

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Now, minutes of the last meeting of the rate-setting panel has revealed that members are divided on the issue of rate hike. While some members have pressed for an immediate repo rate hike of more than 100 basis points (bps), others have favoured less aggressive rate action in future, according to a report in Livemint.

The report said that Jayanth R. Varma advocated for increasing the rate hike by 100 basis points, with a 50 basis points hike in May itself. 

“It appears to me that more than 100 bps of rate increases need to be carried out very soon. Whatever symbolic or psychological benefit there may be from keeping the hike below 50 bps is outweighed by the simplicity and clarity of moving in round multiples of 25 bps,” the report quoted Varma as saying.

MPC member Ashima Goyal, however, said that excessive interest rate hikes may not be necessary going forward. She added that a possible cut in fuel tax could reduce future rate hikes.

“Markets were already overreacting to global risk, and to adjustment in liquidity that started last year, and they have already priced in excessive rate hikes. Since consumer demand continues to be soft and inflation is likely to reduce it further, such excessive rate hike may not be necessary to impose the quantum of output sacrifice required to moderate inflation. A surprise in timing with an unannounced meeting at the start of the rate hike cycle may be better to mitigate further over-reaction,” the report quoted Goyal as saying. 

MPC member and RBI deputy governor Michael Patra suggested a calibrated approach to hikes once the RBI reached pre-covid “neutral accommodation”.

The RBI only recently increased the repo rate by 40 basis points (bps) from 4 per cent to 4.4 per cent. Consequently, several banks and lending institutions have now increased their home loan and deposit rates. The repo rate is the rate at which the RBI lends to banks and other lending institutions.

Many experts have said that the RBI hiked the repo rate to tackle inflation.

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