Get set for a clear pinch on interest rates. The Reserve Bank of India, one day ahead of a policy review meeting, signalled clearly on Monday that inflation risk has increased and containing the monster would be its prime task.
While there is speculation on whether Governor Duvvuri Subbarao will raise the policy rates by half a percentage point or leave it at just a quarter, the direction is clear.
Home and auto loan holders better be prepared to pay more in installments. Wholesale price-based inflation is at around 8.43 %, well above the 5.5 % that RBI wants by end-March.
Higher rates makes money costlier, squeezing demand that fans inflation. But economists say some inflation is also due to a shortage of supplies.
“Since a lower inflation regime is essential for sustainable high growth, containing inflation becomes the dominant policy objective in the current environment,” said the RBI in a document on macroeconomic developments.
Though the central bank has been steadily tweaking up its rates to control surging prices, experts point out that its balancing act between growth (for which high rates are an enemy) and inflation control is over. The vote is now for the latter.
“The repo rate may be raised by 50 basis points,” said Abheek Barua, chief economist at HDFC Bank. “It might prevent inflation from spiking further.”
Repo is the rate at which RBI lends to banks, while the reverse repo is the rate at which it takes money from banks. “The RBI can’t bring down the food inflation but it can control its transmission to other sectors,” said D K Joshi, principal economist at Crisil.