The central bank should first try and bring down retail inflation to 6% – the upper band of its medium-term target – before modifying the pace of its rate increases Said C Rangarajan, the best-known economist and former governor of the Reserve Bank of India (RBI)
Although the central bank does not set a specific aim for the rupee, Rangarajan Said “the point actually is we can’t, for that reason, let the rupee go wherever it goes.” “At that point, the trade terms will work against us. To be able to stop any sudden depreciation of the currency, we need truly take action, he said. Given that the US Federal Reserve has resorted to aggressive tightening, Rangarajan stated that raising the interest rate at this time will not only help reduce inflation but also prevent a severe decline in the value of the rupee relative to the dollar.
Two of the six members of the monetary policy committee (MPC) advocated for a freeze to rate increases in the September review. Ashima Goyal said the MPC should wait and watch to determine whether the policy action thus far is sufficient or not, while Jayant Varma held that further rate hikes could stall an increasing growth recovery. While Jayant Varma maintained that a further rate increase could destroy a budding growth recovery.
The RBI has boosted the benchmark lending rate by 50 basis points on each of the last three occasions and by a total of 190 basis points to 5.9% since May. Retail inflation exceeded the RBI’s medium-term aim of 2-6% for a ninth consecutive month in September, reaching a five-month high of 7.41%. Even though the rupee has lost almost 10% of its value against the dollar in 2022, it has still outperformed many of its peers’ currencies.
