| Log in

RBI Raises Repo Rate, May Not Be The Last

16 September, 2011

The Indian central bank, whose monetary tightening measures since March 2010 failed to rein in high inflation in the country, has continued with its predictable stance and raised the repo rate (the rate at which the Reserve Bank of India lends short-term funds to commercial banks) by 25 basis points, from 8.0 per cent to 8.25 per cent, with immediate effect.

The move has been widely anticipated, given the high inflation in the country with India’s wholesale price index rising by a higher-than-expected 9.78 per cent in the month of August over the year-ago period, the food price index rising 9.47 per cent and the fuel price index climbing to 13.01 per cent for the week ended September 3 over the same period last year.

RBI recognises that its monetary policy stance has had some negative impact on the growth but sees it as dousing demand-pull inflation.

“The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, although both remain at levels beyond the Reserve Bank’s comfort zone. As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12,” the RBI has stated.

The central bank has also added that any immediate change in the policy stance may harden inflationary expectations, thereby diluting the impact of past policy actions. “It is, therefore, imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments,” it says.

But with the 12th hike in key policy rates in the past 18 months, the question is whether the country’s monetary authority has hit a cul-de-sac. The central bank has indicated that it is not letting down its guard and will continue to espouse an anti-inflationary policy – which effectively means its future actions will depend upon how the price index moves.

Even extreme optimists do not foresee any sudden decline in inflation, given that the fuel price has just been raised to the highest level ever, which is going to result in its own lagged impact on prices of other goods and services in the country. Therefore, has the RBI’s policy rate hike cycle peaked out? No, say analysts who expect at least one more round of policy rate hike in the coming weeks if the inflation pressure does not tone down.

With interest rate-sensitive industries such as automobiles and real estate already facing a demand crunch, and mounting margin pressure on businesses, it remains to be seen what the RBI would do next if the global crude oil price and domestic food prices refuse to climb down by the end of the year.

 


Leave Your Comment
RBI Raises Repo Rate By 25 Basis Points

RBI Raises Repo Rate By 25 Basis Points

Reuters 6 years ago
The Reserve Bank of India (RBI) raised interest rates on Tuesday for the 13th...
RBI remains hawkish, raises repo rate by 25 bps to 7.75%

RBI remains hawkish, raises repo rate by 25 bps to 7.75%

TEAM VCC 4 years ago
The Indian central bank continued its hawkish stance on fighting inflation with...
RBI Raises Repo Rate By 25 Bps, Tenth Hike In 15 Months

RBI Raises Repo Rate By 25 Bps, Tenth Hike In 15 Months

Reuters 6 years ago
The Reserve Bank of India (RBI) raised interest rates on Thursday for the tenth...
No Comments

RBI Raises Repo Rate, May Not Be The Last

Powered by WordPress.com VIP