Rate hikes since May 2022 helped reduce inflation by 1.60%: RBI paper

22 Oct 2024 Evaluate

A paper by senior Reserve Bank of India (RBI) staffers Michael Patra, Indranil Bhattacharyya, Joice John and Avnish Kumar, has said that the macroeconomic impact of monetary policy on aggregate demand and inflation indicates that the cumulative rate hikes of 2.5 percentage points by the central bank since May 2022 negatively contributed to aggregate demand and headline inflation by 1.60 per cent each till Q2 of FY25.

The RBI paper said policy rate increases have anchored inflation expectations and modulated aggregate demand, generating disinflationary responses. Making it clear 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 can be noted that in the past, the RBI brass has denied that the elevated interest rates has had any impact on the growth. In the past, questions have also been asked in some quarters about the impact monetary policy can have on inflation when it is fuelled by supply-side factors.

It further argued that a significant negative impact on inflation expectations is observed on account of policy rate tightening on the real economy. The long-run elasticity of the policy rate with respect to inflation expectation reveals that an increase in policy rate anchors expectations effectively. It said anticipated policy changes do not have any instantaneous impact on long-term rates but policy ‘surprises’ significantly impact all market segments and across tenors. Policy 'surprises' are found to have a relatively lower but significant pass-through to the exchange rate and equity prices.