Money & Banking

Will Rajan spring a surprise?

Satyanarayan Iyer Beena Parmar Mumbai | Updated on March 13, 2018

If Raghuram Rajan’s short stint at the RBI is any indication, then a hike in the repo rate (the rate at which banks borrow from the RBI) seems likely in the forthcoming monetary policy review on Wednesday.

Inflation, which softened since April and even fell below the RBI’s comfort level of 5 per cent, has been tailing up since July.

The RBI Governor, who was hailed by the industry and analysts for bringing in fresh thinking to the central bank, has raised the key interest rates twice in as many policies he has presided over. He will likely do an encore on Wednesday.

After he took charge on September 4, Rajan postponed the scheduled September 17 policy by three days to September 20, evidently to know the WPI inflation numbers and the possibility of a taper by the US Federal Reserve to its$85-billion-a-month monetary stimulus programme. When the inflation figures for August were announced on September 16, the widely-tracked Wholesale Price Index (WPI)-based inflation rose to 6.10 per cent from 5.78 per cent in July. Also, the US Federal Reserve Chairman, Ben Bernanke, postponed the scale-back of its stimulus programme.

On September 20, Rajan raised the key rates — repo and reverse repo rates — by 25 basis points each.

“Recognising that inflationary pressures are mounting and determined to establish a nominal anchor which will allow us to preserve the internal value of the rupee, we have raised the repo rate by 25 basis points,” Rajan said in his policy statement then.

In the October meeting, Rajan again raised the key rates by 25 basis points after September WPI and retail inflation had increased by 6.46 per cent and 9.84 per cent, respectively.

When Rajan takes a mid-quarter policy review on December 18, he will have encountered a similar set of challenges. The retail inflation has spiked to 11.24 per cent in November and WPI inflation has risen to 7.52 per cent. The momentum in inflation is, however, likely to reverse with increased food supply from December post a good monsoon.

Though all economic indicators point to a rate hike, will Rajan spring a surprise?

Published on December 16, 2013

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