RBI MPC minutes show its ready for trade wars, global market turmoil

Posted on by KNBT

The events that have transpired in global markets since the MPC meeting show RBI was right in going for a rate hike. Photo: Mint

The events that have transpired in global markets since the MPC meeting show RBI was right in going for a rate hike. Photo: Mint

In many respects, the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) anticipated the current bout of volatility in the global currency and financial markets, the minutes of its 30 July to 1 August meeting show. When the central bank’s rate-setting panel met earlier this month and ended up voting for a policy rate hike, trade wars and financial market volatility were among the top factors debated.

The RBI MPC minutes released on Thursday show that the impact of financial market volatility, currency and trade wars was looked at both from the growth and inflation angles.

The five members who voted for a rate hike believed that spillovers from trade wars have the potential to infuse greater volatility into the domestic inflation print.

Long-standing hawk Michael Patra, the executive director in charge of monetary policy at the central bank, pointed out that financial turbulence feeds into volatile inflation.

Patra also noted that global spillovers are impacting bond and foreign exchange markets in the country. RBI can ill-afford to stay away from the official target of 4% retail inflation.

The central bank’s own assessment says that a 5% depreciation of the Indian currency can increase headline inflation by 20 basis points. In hindsight, the RBI rate hike looks opportune given that the rupee has plunged to its historic lows in the last two weeks and has lost 10% of its value since January.

Adding strength to this view was deputy RBI governor Viral Acharya, who noted that notwithstanding the recent fall in crude oil prices, they remain a significant risk to inflation. Global oil prices are still above the comfort level of the central bank and the recent widening of the trade deficit is proof that oil is still a big worry.

The fact that India has been the worst-hit among the Asian economies in currency volatility shows what a widening current account deficit can do at a time when global investors are turning unfriendly. Since one feeds the other, the MPC members voted to be vigilant for the likely instability that the turmoil in global trade and financial channels can render to domestic markets.

But global turmoil impacts growth, too, and here, RBI governor Urjit Patel and his colleagues noted that growing trade protectionism is unhealthy for the recovering Indian economy.

On the other hand, well-known policy dove, Ravindra Dholakia believes that this is the reason for keeping rates unchanged. Dholakia differed widely from other members on the impact of minimum support price increases announced by the government, the main reason that swung them towards voting for a rate hike. He also read the impact of global tariff wars differently and said they do not augur well for exports and global growth. Patel, too, felt that protectionism would hurt exports and, thereby, domestic growth prospects.

But the events that have transpired in global markets ever since the MPC meeting show that RBI was right in raising rates and that a weak currency has just made the 4% inflation target more difficult to achieve.

Share and Enjoy !

0 0
About the Author

Leave A Response