Rate hikes by central banks to dampen demand, prolong recovery: Sources

Following RBI’s off-cycle repo rate hike, the Federal Reserve has been the most aggressive in raising the lending rate by 0.50 per cent

   
rate hikes by RBI to dampen demand

Tightening of policy rates or rate hikes by major central banks, including the RBI, would adversely impact demand in the next 6-8 months and slow down the recovery process, sources said.

Besides the Reserve Bank of India (RBI), several central banks including the US Federal Reserve and Bank of England have hiked their benchmark lending rates to rein in inflation, which has been exacerbated by the Russia-Ukraine conflict.

The ongoing Russia-Ukraine war, which has entered the 77th day, has disrupted global supply chains and further pushed commodity prices, especially for fuel and foodgrains, across the world.

According to sources, decisions of various central banks will have a bearing on the demand, thus hurting the global economy which has yet to reach a pre-pandemic level.

Even in the past, sources said, inflation was mainly on account of supply constraints which have worsened due to the war.

All the major central banks are now forced to act, the sources said, adding the focus the world over for the next 6-8 months would be to bring down inflation by killing whatever demand there is.

All the central banks are now going to drive their economies towards a decline in demand through rate hikes, the sources said.

The Federal Reserve has been the most aggressive as it raised the lending rate by 0.50 per cent. It followed the RBI, which is an off-cycle action that hiked the repo rate by 40 basis points (0.40 per cent). Among other major central banks, the Bank of England and the Reserve Bank of Australia increased interest rates by up to 25 basis points.

Most of these central banks have also indicated future rate hikes to bring down elevated inflation.

With the current and prospective rate hikes, whatever little pent-up demand is there will be killed and whatever little support inflation was getting will be wiped out, sources said.

The RBI, according to sources, has also been intervening in the forex market for the last few days to check rupee volatility.

The rupee plunged to its lifetime low of 77.44 against the US dollar earlier this week, before staging a modest recovery.

Sources said the RBI action was not targeted at finding any particular level for the rupee but to avoid sharp movements.

On the declining forex reserves, sources said it is due to valuation losses because the dollar is gaining strength.

The next reading of the forex reserve would be positive unlike the past week when it witnessed a decline, they added.

India’s forex reserves have slipped below the US$ 600 billion mark, as per the latest data published by RBI. It had touched a high of US$ 642.54 billion in September 2021.