oppn parties RBI: Inflationary Pressures Induce Rate Hike

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  • Government planning a loan mela to cover 400 districts in two phases
  • PM Modi says Kashmiris need a hug from all Indians
  • NPA tag will not be put on any MSME till March 20
  • Government likely to announce another economic stimulus package today ahead of the GST Council meet in Goa
  • Air Marshall RKS Bhadauria, slated to retire just a few days from now, to be the next chief of IAF
  • PM Modi slams politicians from his own party who are making irresponsible statements on the Ayodhya case and tells them to wait for the Supreme Court order
  • Telecom panel says resident welfare associations (RWA) cannot give monopoly access to any one service provider and infrastructure in public spaces and residential complexes will have to be shared by all
  • Mamata Banerjee meets Amit Shah, tells him there is no need for an NRC in Bengal
  • After 14 days, there is no hope left for reviving Vikram, the moon lander
  • CBI teams search for elusive Rajeev Kumar
  • Union minister Babul Supriyo assaulted at Jadavpur University
  • West Bengal governor's convoy not allowed to enter Jadavpur University following a blockade by Left students' union
  • ABVP supporters create ruckus at Jadavpur University in Kolkata
  • The Army conducts an operational alert exercise in eastern Ladakh
  • The IAF reopened the Vijaynagar advance landing ground, an airstrip in Arunachal Pradesh near the Chinese border
Government announces cuts in corporate income tax, stock markets welcome the decision with a massive jump
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RBI: Inflationary Pressures Induce Rate Hike

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.
For the first time in four years, the RBI MPC raised the repo and reverse repo rates by 25 basis points to make them 6.25 and 6% respectively. This has been done to make borrowing costlier in the wake of rising inflation and expectations of further inflationary pressures. The met department has forecast a normal to good monsoon this year which means that there will be abundant crop. Couple this with the game of political oneupmanship being played around farmer distress that is sure to raise minimum support prices.

Both these events will put money in the pockets of the rural population and there will be huge demand for goods from them, further increasing the inflationary trend. Then, international price of crude and commodities show no sign of easing. The RBI has already identified inflationary trend in sectors such as transport and communication, clothing, household goods and services, health, recreation, education, and personal care. It has also made an upward revision of its inflation projections for both half of the current financial year.

In such a scenario, it is prudent to follow a tight money policy and raise rates. People with home and other loans might be asked to pay an increased EMI as a result, but the effect is going to be minimal especially as several banks, led by SBI, had increased their lending rates by 10 basis points just a few days back. It seems that it was done in expectation of an RBI increase and the banks may not raise their rates further.

It is wrong to believe that small rate increases lead people to put off investment. If a project is good and viable, a 25 basis point rate increase is not going to put much pressure on its finances. Entrepreneurs are going to look for finance and keep investing, irrespective of small increase in interest rates, as long as the overall outlook for the economy remains positive. The inflation-driven rate increase by the RBI will not act as a dampener for investment, especially since the economy is on the path of revival after having shaken off the effects of twin disruptions in demonetization and GST roll-out. Keeping this in mind, the RBI has raised the quantum of SLR, giving banks more leeway in lending.