Cooling prices is priority. Growth will follow.
That seems to be the broad message from Reserve Bank of India (RBI) governor Raghuram Rajan as he unexpectedly raised the repo rate — RBI’s key lending rate — by 0.25 percentage points to 8% on Tuesday.
The RBI’s latest move signalled the central bank’s resolute commitment towards price control by raising borrowing rates to cool demand as its topmost priority, even if it may cast side effects on growth in the broader economy.
“Consumer price (retail) inflation is too high, we need to bring it down…We have injected some medicine,” Rajan told reporters after the third quarter monetary policy review on Tuesday.
Rajan has raised the repo rate thrice by 0.25 percentage points each in four policies he presented since taking over as India’s central bank chief in September.
“We have to watch how this medicine works. We think we should be able to reach the 8% objective by the end of the year,” said Rajan.
For the RBI, which is seeking to keep the inflation genie firmly bottled up, inflation rates, despite the recent easing, is still high enough to keep loan rates high.
India’s wholesale inflation rate eased to a five-month low of 6.16% in December, while retail inflation grew at a three-month low rate of 9.87% in December, from 11.16% in the previous month as fresh seasonal arrivals pushed down vegetable prices.
Rajan defended the rate hike saying inflation control was key to achieving sustainable growth.
“If you cut policy rates, it’s not going to create immediate reduction in banks’ cost of funds, it’s not going to create any immediate filter through to borrowers’ cost of funds and it’s not going to create any immediate demand. Ultimately, the best way we can create sustainable growth is by bringing down inflation,” Rajan said.