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The cumulative interest rate hike of 2.5 percentage points by the Reserve Bank of India (RBI) since May 2022 has negatively impacted headline inflation by 1.60 percent. This has been stated in a paper written by senior RBI staff on Monday. According to PTI News, the paper, written by Deputy Governors Michael Patra, Indranil Bhattacharya, Joyce John, and Avnish Kumar, said that the increase in the policy rate has stabilized inflation expectations. This has controlled the overall demand.
The paper does not represent the views of the central bank.
According to the news, it has been clarified in the RBI paper that the paper does not represent the views of the central bank, the study on monetary policy transmission found that monetary policy changes affect short-term interest rates more than long-term rates. It said that the macroeconomic impact of monetary policy on aggregate demand and inflation shows that the increase of 2.50 percent from May 2022 has contributed negatively to aggregate demand and headline inflation by 160 bps by the second quarter of 2024-25, working through different channels of policy transmission.
Higher interest rates do not affect growth.
It is worth noting that in the past, top RBI officials have denied that higher interest rates have any impact on growth. Earlier, questions have also been asked in some quarters as to what impact monetary policy can have on inflation when it is driven by supply-side factors. The RBI paper released on Monday argued that the real economy has a significant negative impact on inflation expectations due to policy rate tightening.
The increase in the policy rate effectively stabilizes expectations.
The paper said the policy rate about inflation expectation shows that policy rate hikes effectively stabilize expectations. It said anticipated policy changes have no immediate impact on long-term rates, but policy surprises significantly affect all market segments and periods. It elaborated that policy surprises have a relatively small but significant impact on exchange rates and equity prices.
