Cheap loans end as inflation bites hard
The Reserve Bank of India (RBI) governor-led Monetary Policy Committee (MPC) has finally declared the end of cheaper loans as it shifted its policy stance to “withdrawal of accommodation” and increased the repo rate by 50 basis points to 4.90 per cent to bring down inflationary expectations. This is the second rate hike in as many months.
Explaining his rationale for the rate hike, RBI governor Shaktikanta Das blamed the Russia-Ukraine war and monetary policy normalisation undertaken by advanced economies for global inflation. In India, the retail inflation — or Consumer Price Index (CPI) — in April registered a further sharp increase to 7.8 per cent. It was the fourth consecutive month when inflation touched or was above the upper tolerance level of six per cent. The surge in headline inflation was seen across all major categories.
Though recent actions by the government helped to rein in inflationary expectations, the RBI governor felt that there are continued risks 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 A price rise would
recent spike in tomato prices which are lead to shrinkage of adding to food inflation; and most important of private consumption. all, the elevated international crude oil prices. If the other two While some of these issues could be
addressed by the government and RBI, most growth engines —
are linked to the global trade and normal trade government practices which cannot be addressed by the expenditure and policy alone. The price rise is a global reality exports — do not fire and people must temper their expectations
from the government. A price rise would definitely well, the economy eat into the discretionary budget of people, could be staring at a especially the middle class. At the aggregate slowdown. level, it would lead to shrinkage of private
consumption, which has been the major contributor to the economic growth in India. If the other two growth engines — government expenditure and exports — do not fire well, the economy could be staring at a slowdown.
As part of its other announcements, the Reserve Bank said credit cards — initially those issued by RuPay credit cards — can now be linked to United Payment Interface (UPI). UPI is one of India’s success stories, which eased payments in the country, and is being studied by many countries for potential adoption. While this is a welcome development, it will not contribute significantly to increasing the digitisation of payments as the share of debit cards is more than credit cards in India.
The central bank’s decision to increase the e-mandate on cards for recurring payments from `5,000 to `15,000 per transaction will help businesses which run on subscription-based models and contribute to the ease of doing business. The RBI has also announced that a digital rupee will be introduced in this fiscal year. When the digital rupee is launched, it would be a new milestone in India’s financial journey but how it would help the common man is yet to be seen.