Third Bi-monthly Monetary Policy of RBI

1. Repo rate is the rate at which RBI lends money to commercial banks. This serves as a benchmark for banks to decide their lending rates. RBI has increased the repo rate from 4.40% to 4.90% in the May Policy due to recent spurt in inflation. Taking cue from RBI, banks will increase their lending rates.

2. Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks. This rate serves as a benchmark rate for banks to decide their Rate of Interest (ROI) on deposits. The RBI has not changed it and maintained at 3.35%.

3. Inflation- It is mandatory on the part of RBI to maintain the medium-term target for Consumer Price Index (CPI) of 4% (within a band of +/- 2%), while supporting growth.

The Consumer Price Index inflation in April registered a further sharp increase to 7.8%. It was the fourth consecutive month when inflation touched or was above the upper tolerance level of 6%. The surge in inflation was seen across all major categories.

The uncertainity in global geopolitical situation caused by Russia Ukraine conflict has rendered volatility in the domestic inflation outlook. These factors pose upside risks to inflation. These risks emanate from elevated commodity prices; revisions in electricity tariffs across many states; high domestic poultry and animal feed costs; continuing trade and supply chain bottlenecks; rising pass-through of input costs to selling prices in the manufacturing and services sectors; the recent spike in tomato prices which are adding to food inflation; and most important of all, the elevated international crude oil prices which has touched 120$ per barrel against 70$ per barrel in January 2022. RBI has estimated that inflation during first quarter of March-June 2022 will be at 7.5% ; during second quarter of July - September will be at 7.4%; during third quarter of October-December will be at 6.2% and during fourth quarter of January -March 2023 will be at 5.8%. RBI has noted that around 75 per cent of the increase in inflation projections can be attributed to the food group. However with the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 105 per barrel, RBI has now projected that inflation will be at 6.7% in 2022-23.

Certain positive developments on the prices front in recent weeks may help to ease the acute price pressures to some extent. These developments include expectations of a normal south-west monsoon and kharif agricultural season; the recent supply side measures taken by the government and the unfolding of their impact; lifting of the palm oil export ban by Indonesia; and signs of moderation in global industrial metal price indices.

Authors View on Inflation-The current spurt in Inflation is largely because of exorbitant increase in crude oil prices in International Markets and increase in food and vegetable prices in domestic markets. However timely initiative of Indian Government to reduce dependency on Gulf countries for Petroleum has gone unnoticed as Russia overtook Saudi Arabia to become India’s second-largest supplier of crude oil last month with average daily Russian oil exports to India stood at 8,19,000 barrels, compared with a meagre 2,77,000 barrels daily in April. India buys about 18% of Russian crude oil exports now. It is more interesting to note that some of the fuel Indian refiners produce using Russian crude is then exported, with some of it even to United States. Russian crude is available at a steep discount of 30 $ per barrel as compared to traditional suppliers since the start of the Russia-Ukraine war. India has imported five times the amount of all the Russian crude it bought in the whole of 2021. Imports of Russian oil since the start of 2022 have totalled 60 million barrels versus 12 million barrels for the entirety of 2021 despite warnings from the United States to stop buying so much Russian oil. This can be attributed to success of Indian diplomacy to safeguard its fuel security. India relies on imports to satisfy more than 80 percent of its crude oil demand, which makes it particularly vulnerable to international price rallies.

The second largest contributor to inflation is rising food prices which can be attributed to increase of Minimum Support Prices, storage and logistic issues and involvement of middlemen in agriculture sector. The government is addressing these issues which will benefit farmers and consumers both.

The higher inflation is a great menace for economic development and general well being of people and it must be brought down. But one should not ignore the fact that higher inflation is a global phenomenon. Annual inflation rate in the US unexpectedly accelerated to 8.6% in May 2022, the highest since December of 1981. Just for the sake of information, inflation in Sri Lanka jumped to 40% in May 2022 with Food inflation at 57.4%, while non-food at 30.6%. It is expected that all efforts of Government to control inflation will bring down it to permissible limits of 6% by the end of this year.

4. Growth -According to the provisional estimates released by the National Statistical Office (NSO) on May 31, 2022, India’s real gross domestic product (GDP) growth in 2021-22 is estimated at 8.7 per cent. The level of real GDP in 2021-22 has exceeded the pre-pandemic (2019-20) level. On the supply side, major categories also surpassed the 2019-20 levels.

5. External Sector-India’s exports have performed exceptionally well despite a weakening recovery across major trading partners. The impact of rising crude oil prices on petroleum, oil, and lubricants (POL) import bills has been partly offset by the export of petroleum products, which also benefitted from better price realizations in recent months. Optimism on exports of both goods and services and remittances should help contain the current account deficit (CAD) at a sustainable level, which can be financed by normal capital flows. As of June 3, 2022, India’s foreign exchange reserves were of the order of US$ 601.1 billion.

The Monetary Policy of RBI is always loaded with the jargon of financial languages and hence it becomes difficult for the general public to understand it. However, when we are stressing the need for financial literacy among the masses, the real stakeholder of the economy of the country, this article is a modest attempt to explain the Monetary Policy for the benefit of the common people.