RBI is unlikely to hike interest rates immediately despite inflationary pressures from the energy crisis, as it's a supply-side shock, says an economist. Raising rates won't solve the core issue and the RBI will likely wait for now.
The Reserve Bank of India (RBI) is unlikely to immediately raise interest rates despite inflationary pressures from rising crude oil prices, as the current situation reflects a supply-side shock rather than demand-driven inflation, according to Trinh Nguyen, Senior economist, Emerging Asia at Natixis.
In an exclusive conversation with ANI while discussing the ongoing energy crisis triggered by the conflict in West Asia, Nguyen said central banks are unlikely to react with immediate rate hikes as the situation is still evolving. "I don't think any central bank is going to hike rates right now, just because we have a situation where we have a supply shock. It's so early, and we don't know how long the duration of this is," she said.
Why a Rate Hike is Ineffective Now
Nguyen explained that raising interest rates affects the entire economy and may not solve the core issue, which currently stems from disruptions in energy supply rather than excessive demand. "When you raise interest rates, it goes through the whole economy. Sectors like real estate are very sensitive to interest rates. But that is not going to solve the supply problem that we have right now," she said.
She added that policymakers may instead rely on other measures, similar to approaches adopted during the COVID-19 period, rather than using interest rates as the primary tool.
Long-Term Inflationary Risks
According to Nguyen, if the conflict continues for a longer duration, the energy shock could gradually spread across the broader economy and increase inflationary pressures. "The longer the duration of this is, it will feed through transportation costs, flying costs and eventually food costs. Then inflation pressure will go higher," she said.
Nguyen noted that while inflation may rise over time, the starting point remains relatively low due to factors such as a good monsoon season and changes in inflation measurement weights. "At the moment, rates are low because of many factors, including a good monsoon season and the rebasing of weights. The low base also means inflation is starting from a lower level," she said.
Future Policy Moves
Nguyen said the next policy move by the RBI could eventually be a rate hike, but not immediately. "The next move is probably going to be a hike for the RBI, but it's not going to do that now. Like most central banks in the region, it will likely wait," she said.
She also suggested that monetary policy could instead be used to stabilise the rupee or calm excessive volatility in financial markets if required. "If the rupee is excessively sold or markets face a giant sell-off, monetary policy can be used to smooth volatility and restore confidence," she added. (ANI)
(Except for the headline, this story has not been edited by Asianet Newsable English staff and is published from a syndicated feed.)