The RBI governor wants you to have better jobs and incomes and at the same time, hopes the stuff you buy will not get costlier. But often, he has to choose between the two. Which is what he did again on Thursday as he tilted the balance more towards battling inflation by raising two key policy rates to make loans costlier in the economy.
“Inflation remains the dominant concern in macroeconomic management,” RBI said as it unveiled its first mid-quarter review of the economy under a new regime to monitor rates.
Governor Duvvuri Subbarao hiked the repo rate – the rate at which banks from RBI-- by 0.25 percentage points to 5.75 per cent. This carries the risk of affecting investment by making funds costlier for companies, prompting them to defer expansion plans.
“Tight liquidity scenario is expected to prevail which will further strengthen the policy transmission and result in banks increasing their lending and deposit rates,” said Ashvin Parekh, national leader, financial services, Ernst & Young.
Inflation measured in food prices reached 15.10 percent for the week ended September 4 as cereals, select vegetables and milk became costlier after rains disrupted the supplies.
RBI said inflation is likely to remain at “unacceptably high” levels for some months. Overall inflation is now at 8.5 per cent.
“In our view, the RBI’s combined assessment of inflation, growth and real interest rates does not indicate a bias towards an immediate pause in monetary policy tightening, and is therefore not dovish,” said Samiran Chakraborty, Regional Head of Research, India, Standard Chartered Bank.
The headline inflation remains significantly above the long-term trend of 5.0–5.5 per cent observed over the past decade.
But the good news is that economic recovery after a poor monsoon last year and a meltdown hit global economy is strong, with industry growing well and rains this year normal. India’s GDP grew by 8.8 per cent in the April-June first quarter.
Somewhat optimistically, RBI noted that the “big picture has not worsened since July”.