Reserve Bank of India Policymakers Decide to Wait but Remain Vigilant about Inflation

December 20, 2013

This week’s mid-quarter policy review left the repo rate at 7.75%, the reverse repo at 6.75% and the cash reserve requirement at 6.75%.  The decision not to tight further was a difficult one.  In a world of disinflation, India sticks out as one place where excessive inflation remains stubbornly entrenched.

There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation.

The policy decision is a close one. Current inflation is too high. However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty.

The repo rate was earlier hiked by 25 basis points each on September 20 and October 30.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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