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Economy
A measured move
Ajay Mahajan
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The central bank has moved in time, on a precautionary basis, to rein in potential inflationary pressures.
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THE RBI's Review has evinced a lot of interest, not only from bond traders and bankers, but also from the equity market which, in a correction mode. The RBI has recognised the overall macro-economic pressures on several fronts despite the strong growth.
The reverse repo rate and repo rates were hiked by 25 bps, in line with the broad market consensus. However, the RBI avoided a Bank Rate hike, which was perhaps needed in the wake of a) global tightening cycle, with the US Fed Funds Target rate heading past 4.5 per cent; b) worsening BoP position with an expected current account deficit of 3 per cent, and a trade account deficit of 6 per cent; and c) rising inflation, as a result of brewing demand pull pressures.
One of the forces in fighting inflation — a strong rupee — is no longer available to the central bank. The portfolio flows have taken a breather and with the dollar recovering strength against other global currencies, the rupee has weakened by 4 per cent since the previous policy review. The RBI has moved in time to rein in potential inflationary pressures.
(The author is President, Financial Markets, Yes Bank.)
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