In less than a week of Canada raising the repo rate or interest rate, India too has made a similar upward revision. The Reserve Bank of India (RBI) on Wednesday hiked the repo rate or the interest rate at which it lends to banks by 50 basis points to 4.9 per cent. The RBI also hiked the marginal standing facility rate from 4.65 per cent to 5.15 per cent.
Like Canada, it is the second hike in as many months that will put pressure not only on equated monthly instalments but will help gradually temper inflation that is eroding household savings.
In Canada, where the Housing market had witnessed an unprecedented boil with houses in major cities like Toronto and Vancouver where houses were overselling than their listed prices, the upward revision of repo or interest rates has somewhat calmed down the Housing market.
With the Russia-Ukraine war continuing unabated, the governments have resorted to fire fighting to keep the inflation rates under check. In Canada, for example, the gas is now selling over $2.10 a litre.
Indian rupee has been losing value as the US dollar was now quoted at Rs 77 plus. Though inflation rate in India was much lower than the neighbouring Pakistan or Sri Lanka, still the Government was fighting to hold the price line, especially of essential commodities.
Recent reports suggested that tomatoes, an essential ingredient for cooking, touched an all-time high of Rs 100 a kg.
The gold prices continue to be above Rs 5000 per 10 gm.
In a related action the Cabinet Committee on Economic Affairs (CCEA) chaired by Prime Minister Narendra Modi on Wednesday approved the increase in Minimum Support Price (MSP) for all mandated Kharif (summer) crops for the 2022-23 crop year.
The Union Cabinet in its Wednesday’s meeting approved MSP of 14 kharif crops, Information and Broadcasting Minister Anurag Thakur told reporters.
The MSP of common grade variety of paddy has been increased to Rs 2,040 per quintal for the 2022-23 crop year from Rs 1,940 in the previous year.
The support price of ‘A’ grade variety of paddy has been hiked to Rs 2,060 per quintal from Rs 1,960.
Paddy is the main kharif crop, the sowing of which has already begun. The Met department has projected normal monsoon for the June-September period.
The revised MSP has come in for mixed reaction from various farmers organisations as most of them described the hike to be “far short of their expectation” in view of the unprecedented hike in prices of diesel, an essential ingredient of farm production, and other chemicals, including fertilizers, insecticides and pesticides.
Since the food prices have a direct bearing on inflation, hike in MSP of kharif crops is being viewed as a measure to combat rising prices of agricultural inputs as well as compensatory for farmers to meet their rising cost of production.
The minister also highlighted several programmes launched during the last eight years by the Modi government to boost farmers’ income and ensure comprehensive growth of the farm sector.
The RBI by announcing two recent hikes in repo or interest rates was working in line with other financial institutions to keep inflation in control.
The RBI’s Monetary Policy Committee, which made the recommendation, is now focused on “withdrawal of accommodation” instead of “remaining accommodative” as was the case till now. This means that the Central bank will set in motion policies that will tighten the easy lending policies that had prevailed during the pandemic.
Media reports quoting RBI and financial experts said that the inflation would continue above the RBI’s upper tolerance band of six per cent till the third quarter of the current fiscal or till the end of December this year. They also put the average inflation during current fiscal above 6.7 percent. As such the policies of the Reserve Bank may not be effective in reining in price controls . Even this 6.7 percent, as projected by RBI on a normal monsoon and average oil price of $1 05 per barrel, looks untenable.
Das said about 75 per cent of the contribution to the high inflation rate is because of the food group. The RBI retained its already-lowered real GDP growth expectations of 7.2 per cent down from the earlier 8.5 per cent.
Das said the central bank would ensure the orderly implementation of the government’s borrowing program. The RBI is watching the government securities market, he said.