The growth-inflation dynamics in India warranted another dose of rate hike. The RBI has maintained for quite some time that it does not mind sacrificing a bit of growth to bring down inflation.
The question at this juncture was — have we sacrificed enough of growth and whether inflation has been tamed so as to adopt a different policy stance.
The macro numbers do not indicate a broad-based slowdown and inflation continues to be at double digit levels. The base effect also does not seem to be helping to bring down inflation numbers. Thus, there was a need to continue with the hawkish stance.
The economic news flowing from both US and EU is not at all encouraging and there is an entrenched fear of the developed economies entering into a recession.
The global uncertainty had led some to believe that RBI would go for a rate pause.
A rate pause now would have sent confusing signals to the market as to what is the RBI's priority.
By going for a rate hike, the RBI has signalled that it means business. Given the comfortable liquidity position, banks may not pass on the rate hike soon.
The purpose of today's rate hike was largely to tame inflationary expectations and one gets the feeling that it would help.
Further, the rate hike has created a larger room for monetary policy maneuverability in the event of advanced economies entering a recessionary phase. Going forward, the unfolding of events in the US and the Euro Zone will be the key to the monetary policy stance of the RBI.
(The author is Chief Economist, Bank of India. The views are personal. >blfeedback@thehindu.co.in )