oppn parties RBI: Inflationary Pressures Induce Rate Hike

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  • In reply to a question in Parliament, the government says it is empowered to lawfully intercept, monitor or decrpyt information stored in a computer resource in the interest of sovereignty or integrity of India
  • Police stop a 12-year old girl on her way to the Sabarimala shrine
  • In Karnataka, the JD(S) indicates that it might support the BJP government if it falls short of numbers after the bypolls
  • Congress pips the BJP in local body elections in Rajasthan, winning 961 wards to the BJPs 737
  • After Airtel and Vodafone-Idea, Jio also indicates that tariffs will be raised from December
  • Sources in Shiv Sena say that they might revive the alliance with the BJP if it offers the 50:50 deal
  • A miffed Sanjay Rout of the Shiv Sena says that it will take "100 births" to understand Sharad Pawar
  • Mobile operators Vodafone-Idea and Airtel decide to raise tariffs from next month
  • Sharad Pawar meets Sonia Gandhi and says more time needed for government formation in Maharashtra
  • Justice S A Bobde sworn in as the 47th Chief Justice of India
  • Supreme Court holds hotels liable for theft of vehicle from their parking area if parked by valet, says "owner's risk" clause is not a shield from such liability
  • Finance Minister says she is receiving feedback from many sectors that recovery is happening as there is lower stress
  • Sabarimala temple opens, but police bar the entry of women below 50 years
  • Finance Minister Nirmala Sitharaman says Air India and BPCL to be sold off by March
  • Media person Rajat Sharma resigns as DDCA president
Two Muslim litigants in Ayodhya refuse to accept the Supreme Court order, say review petition might be filed
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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.