‘We need 1% increase of rates’ says Uday Kotak on RBI policy

Reserve Bank of India (RBI) raised the country’s retail inflation rate projection and kept the repo rates unchanged, Uday Kotak, the CEO of Kotak Mahindra Bank has expressed concerns and questioned the decisions.

Kotak said that RBI will have to increase the key rate by 1% if it aims to achieve a zero per cent real rate.

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He tweeted, “Sharp increase in inflation estimate to 5.7% from 4.5% assuming 100$ oil. Exit q4 fy23 estimate 5.1%. Present Repo rate at 4%. If India has to move to 0% real rate that is inflation – interest rate = 0, we need 1% increase of rates. 4 rate hikes of a quarter each?”

In its first monetary policy announcement for fiscal 2022-23, the RBI has raised its inflation forecast to 5.7% against the previous estimate of 4.5%.

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Due to increased geopolitical tensions since the end of February, the RBI has revised its inflation projections upward and sharply reduced its growth projections for the economy in the current financial year, posing a downside risk to economic growth and upside risk to inflation projections.

The RBI’s Monetary Policy Committee (MPC), headed by Governor Shaktikanta Das, decided to keep the repo rate unchanged in its first bi-monthly policy meeting of FY23. This is the 11th time in a row that the central bank has maintained the status quo on the key policy rate.

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Currently, the repo rate stands at 4% and the reverse repo rate has been maintained at 3.35%.

Das said that RBI’s agenda for the year is to control inflation overgrowth, taking into account inflation risks due to the current international instability caused by the Ukraine-Russia war.

On inflation, Das said the rise in international crude oil prices was a substantial risk. A sharp increase in domestic pump prices could result in broad-based price pressures, he added.

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The Governor said that the crude oil prices are expected to remain high and average around $100 per barrel in FY22-23 due to the ongoing geopolitical crisis. This is an upward revision from $75 per barrel made in October last year.

The pressures on feedstocks may spill over to poultry and dairy prices, said Das, adding that the financial market would remain volatile.

The retail inflation is estimated at 5.7% for FY23 and at 6.3% for Q1, 5.8% for Q2, 5.4% for Q3 and 5.1% for Q4.

“Conflict in Europe has the potential to derail the global economy,” Das said.

The approach should be cautious but proactive in mitigating the impact on growth inflation and financial conditions.