Today: RBI governor Shaktikanta Das hinted that interest rates might remain elevated for an extended period. With a 4.75% surge in consumer prices in May, Das expected the June inflation figures, set to be released on Friday, to be close to 5%, according to industry surveys.
Das emphasized that it would be premature to discuss interest rate reductions when inflation is around 5%, overshooting the 4% target. He also noted that rate cuts could adversely impact ‘silent depositors,’ a concern that is typically overshadowed by the clamor for lower rates from borrowers.
The governor underscored the need for a cautious approach, acknowledging that while some central banks guide the timing of rate cuts, the prevailing uncertainty is a global and domestic challenge. Expressing his reluctance to offer forward guidance that could mislead market participants, Das stated, “I would rather not give any forward guidance which would lead market players to board the wrong train.” This approach aims to provide stability and reassurance to the market, as the RBI grapples with the new issue of the adverse impact of rate cuts on depositors.
Banking data from the first quarter suggests that deposit growth has not gained much momentum. Inflation and its adverse impact on savings, as well as the robust economic expansion, may dissuade the Reserve Bank of India from lowering interest rates. Governor Das affirms that the brisk growth pace observed in the final quarter of the previous fiscal year has carried on into the current quarter.
Regarding the stable exchange rate, Das credits the rupee’s resilience to India’s stronger macroeconomic foundations compared to a few years back, noting that the central bank merely manages currency volatility. He further asserts that these solid fundamentals warranted an earlier rating upgrade by global agencies, though market assessments often precede such official evaluations.
Economists attribute a significant portion of the increase in the Consumer Price Index to volatile commodity prices, particularly in food items. While food inflation is not driven by demand factors, the RBI may need to raise interest rates to prevent widespread inflationary expectations, despite its limited ability to address this specific source of price pressures.
The costs of goods and services continue to rise, putting strain on people’s budgets and purchasing power. Inflation is a persistent challenge, as the prices of various products and necessities steadily increase, making it harder for individuals and families to afford their essential needs. This ongoing inflationary pressure is a significant concern, as it erodes the value of money and forces people to make difficult choices about their spending.
