Money & Banking

Inflation makes repo hike inevitable

Our Bureau Mumbai | Updated on October 28, 2013 Published on October 28, 2013

Given the low tolerance the RBI has for high inflation, a repo rate hike in the half-yearly credit policy announcement on Tuesday looks inevitable. The repo rate, currently at 7.50 per cent, was raised by 25 basis points (bps) by the Reserve Bank of India in its mid-quarter review in September.

Food prices (especially onion and rice) have remained stubbornly high despite the good monsoon and have been significant contributors to inflation. Inflation based on the Wholesale Price Index touched 6.46 per cent in September, while that based on retail or Consumer Price Index stood at 9.84 per cent.

Some relief on the food inflation front can be expected with the onset of winter, but a 25 bps hike in repo rate has already been priced in. So, will the Governor oblige and perform the ritual or will he hike the key rate by 50 bps to make it bite? That’s the only issue left for debate.

Some more easing of liquidity tightening measures may happen with a cut in the marginal standing facility (MSF) rate, currently at 9 per cent.

The difference between the repo rate (7.50 per cent) and the MSF rate (9 per cent) is currently 150 basis points and the RBI has indicated that it would prefer that narrowed to 100 bps once the currency market conditions are back to normal. Lately, the forex market has been relatively calm, thanks partly to the special dollar window opened for oil marketing companies. This will also probably be ‘tapered’ gradually so as not to fritter away the gains made in the last month. An announcement in this regard will be awaited keenly.

Those looking for clues on whether the Governor will plump for growth or focus on inflation need look no further than his own statements during his first mid-quarter policy announcement. He repeated the standard formulation that it was not a choice between growth and controlling inflation — the RBI was for both. Only the relative emphasis would vary at different time periods.

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Published on October 28, 2013
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