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Straight from the Specialists

Why the RBI raised interest rates


(Any opinions expressed here are those of the author and not of Thomson Reuters)

The Reserve Bank of India (RBI) raised interest rates at its review on Jan 28. The justification usually given for doing so is inflation.

But at its previous review, when inflation had soared, the RBI was passive and left rates unchanged. Now, with wholesale price inflation (WPI) slowing to 6.16 percent, the RBI was quick to raise the repo rate by 25 bps back to its highest level since the 2008 crisis. Why?

Targeting inflation is surely not the sole object of monetary policy. There have been other considerations, though price stability had precedence. The RBI has recognized the need but did not sufficiently facilitate growth in industry and services. That had been the bone of contention between the RBI and the finance ministry.

The RBI maintained that interest rates alone cannot revive growth because it was suppressed by other obstructive factors, mainly delays in government decisions.

Which inflation should the RBI target?


The Reserve Bank of India (RBI) is entrusted with the responsibility of maintaining price and financial stability, and it has used interest rate and money supply to pursue this objective with unwavering determination. Yet, inflation has survived with matching persistence.

The index that the RBI uses to target inflation is the wholesale price index (WPI), which is the combined price of a commodity basket comprising 676 items. A few prices in this basket can be too volatile or outside the scope of the RBI’s monetary policy, leading to poor results.

Need to rebalance RBI’s interest structure


(Any opinions expressed here are those of the author and not of Thomson Reuters)

In its mid-quarterly monetary policy review last month, the Reserve Bank of India (RBI) made some hasty changes in the interest structure. The repo rate was raised possibly because of the rise in inflation and the marginal standing facility (MSF) rate was cut after the rupee recovered against the dollar. The interest structure is still lopsided with short rates exceeding long rates. This anomaly needs to be corrected.

It is believed that the economy is susceptible to a rundown when short rates exceed long rates. A further slowdown, in any case, needs to be prevented and is quite feasible since the compelling conditions that necessitated an interest hike have been contained. There is now enough room for the RBI to restore balance.

Sooner the better for RBI to unwind grip on liquidity


(Any opinions expressed here are those of the author and not of Reuters)

The Reserve Bank of India (RBI) wasn’t expected to do anything new at its policy review on Tuesday and it did exactly that. But the markets still reacted adversely. The stock market moved in consort with the rupee with the Sensex falling 245 points.

It is generally true that markets overreact, more so in India, partly because market sentiment is affected far too quickly. What evoked these sentiments was the undue concern expressed by RBI Governor Duvvuri Subbarao about external uncertainties, more so about quantitative easing by the U.S. Federal Reserve and food inflation in India.

Why the RBI should cut rates again

(Any opinions expressed here are those of the author and not of Thomson Reuters)

In May, the Reserve Bank of India (RBI) had hesitatingly cut the repo rate by 0.25 percent, which made no impression on the stock market or commercial banks. That was because both expected the cut to be more substantial. But the RBI had not obliged.

Perhaps the monsoon, which arrived on the dot and is progressing satisfactorily, may make some difference to the RBI’s expectations of food inflation – which had been its principal reason for hesitancy. While it’s too early to predict monsoon behaviour for the rest of the season and the likely improvement in agricultural production, it does appear the improvement should be significant and inflation dampened perceptibly. Reduction in inflation, however, is not the only reason why the interest rate should have been cut.

RBI needs to take bold steps


(The views expressed in this column are the author’s own and do not represent those of Reuters)

Expectations of a rate cut were legitimate. But the RBI preferred to pause, not quite convinced that inflation is under control. That has been its singular target though it is dressed up to look more appealing as growth-inflation dynamics.

Time to think beyond monetary policy rates?


(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

Irrespective of the RBI monetary policy review and its outcome, the fact that policy rates have assumed such obsessive focus needs closer scrutiny.

The end of repo rate hike?


(The views expressed in this column are the author’s own and do not represent those of Reuters)

Apparently, the RBI is exasperated. After 18 months of inflation and 13 hikes in repo rate, RBI Governor Duvvuri Subbarao more or less admitted a day before Diwali that the pursuit of interest policy had gone far enough even though it hardly made any different to inflation and only deflated the growth rate instead. But he is not without hope.

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