Rate hikes since May 2022 helped reduce inflation, RBI Study Reveals

Mumbai : The 2.5 percentage point increase in interest rates by the central bank since May 2022 has had a detrimental effect on headline inflation, reducing it by 1.60 per cent, a recent paper by senior RBI employees revealed on Monday. 

According to the paper by Deputy Governor Michael Patra, Indranil Bhattacharyya, Joice John, and Avnish Kumar, raising the policy rate has helped to stabilize inflation expectations and adjust overall demand, leading to decreased inflationary reactions.

RBI Study Reveals Monetary Policy Changes Impact Short-Term Rates 

The study on monetary policy transmission clarified that it does not reflect the central bank's views, and also discovered that changes have a greater impact on short-term interest rates compared to long-term rates. It has been reported that the 2.50 per cent increase in monetary policy since May 2022 has had a negative effect on aggregate demand and inflation, causing a 160 basis point decrease in each until Q2:2024-25 through different policy transmission channels. 

ALSO READ: মহিন্দ্ৰা লজিষ্টিকছৰ দ্বিতীয় ত্ৰৈমাসিকৰ লাভ ৫৪ শতাংশ হ্ৰাস পাই ৮.৫ কোটি টকা হৈছে

Previously, the RBI leadership has stated that the high interest rates did not affect the growth. In previous times, some have raised concerns about how monetary policy influenced inflation due to supply-side factors.

The RBI paper further stated that tightening policy rates has a notable adverse effect on inflation expectations in the real economy. The long-term relationship between the policy rate and inflation expectations indicates that raising the policy rate effectively stabilizes expectations. Anticipated policy changes were mentioned to not immediately affect long-term rates, but policy 'surprises' have a significant impact on all market segments and time periods. Unexpected policy changes have a moderate impact on the exchange rate and stock prices according to the paper.

ALSO READ: Nitin Gadkari reviews Northeast highway projects, urges faster development