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‘Let rate hikes take effect’: RBI’s MPC member Ashima Goyal says Fed needs to hit pause
Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) member Ashima Goyal on Wednesday said that the US Federal Reserve should adopt a wait-and-watch policy to see the effect of its interest rate rather than adopting an excessively reactive monetary policy.
“You cannot just keep raising rates until inflation starts falling. That is a receipt for over-reaction, over-tightening and creating financial instability,” said Goyal.
She added: “It takes a few quarters for interest rate rises to take effect on demand and demand-led inflation. It is appropriate to watch for some time, and allow these to take effect.”
US Fed had kept the rate to near zero, below 1 per cent from December 2009 until April 2017. Then again, it brought down its interest rates from May 4, 2020, to May 23, 2022.
Since 2022, the Fed raised interest rates by 450 basis points over the last year to curb high inflation in the country. The Federal Funds rate currently stands at 4.58 per cent. Last week, Federal Reserve Chairman Jerome Powell said that interest rates are likely to head higher than central bank policymakers had expected.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said.
He added: “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
But the sudden closure of Silicon Valley Bank has raised questions over rate hikes and its severe consequences.
Many experts have said that the Fed needs to hit pause and assess the full impact of its actions (rate hikes) so far before raising short rates further
Goldman Sachs’ analysts on Monday said that there is considerable uncertainty regarding the future path of interest rates beyond March, given the recent stress in the banking sector. As a result, they no longer expect the US Federal Reserve to raise interest rates at its March 22 meeting.
SVB crisis and Fed rates
Startup-focused SVB was a popular entity in the start-up world. At the time of failure, SVB was the 16th largest bank in the US. SVB’s downfall was the result of a bank run after signs of trouble at the bank began to surface last week. The bank used to take deposits from clients and invests them in generally safe securities, like bonds. As the Fed has increased interest rates, those bonds have become worth less.
Last week, SVB announced its public offering of a $1.75 billion share sale to shore up its balance sheet. It liquidated nearly all of the securities in its portfolio that were on the market. In an investor prospectus, the company said it needed the fresh capital infusion to plug a $1.8-billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of US Treasuries.
Following this, the company’s shares suffered their worst drop in over 35 years on Thursday. The company’s stock dipped to its lowest level since 2016. Following this, regulators found that SVB had a negative cash balance of around $958 million. These events caused a bank-run, and SVB was shut down, with the Federal Deposit Insurance Corporation (FDIC) as its receiver.
Also read: ‘More banks to likely fail despite the intervention’: Bill Ackman on Silicon Valley Bank crisis
Also read: Silicon Valley Bank crisis: Softbank’s investment deals might be under lens after SVB collapse
Rate hike in India
Talking about repo rate hike in India, RBI MPC member Goyal said there should be a pause in rate hikes as policy has been tightened significantly over the last year.
“Rates had to rise because they had been cut exceptionally low during the pandemic but when they reach a certain level, you have to go very slowly,” she said.
On Sunday, Goyal had said that inflation rates are expected to come down over the year.
“Government supply-side action coordinated with a flexible inflation targeting regime has kept Indian inflation rates lower than other countries and our own past averages even in this period of major adverse external supply shocks,” she told PTI in an interview.
Goyal said as long as the expected future real policy rate does not rise much above unity, RBI is not over-tightening.
The central bank has raised its benchmark repo rate by 250 basis points since May last year with expectations of another 25 basis points hike to 6.75 per cent in April before hitting pause until year-end.
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