Reserve Bank of India Implements the Third Interest Rate Hike since September 20

January 29, 2014

Note to Readers:  This blog entry was sent originally on January 28 but inexplicably got lost in cyberspace.  Hopefully it will publish now.

All three tightenings by the RBI including today’s and ones in September and October were by 25 basis points.  The repo and reverse repo rate levels become 8.0% and 7.0%, respectively, while the cash reserve requirement is to stay at 4.0%.  Today’s move surprise analysts.  After December’s meeting when policy was not changed, monetary authorities indicated that “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.”  Today’s statement assesses developments since last month meeting and observes that

  • The global recovery is gaining traction.
  • Core CPI inflation didn’t fall last month and remains high. 
  • Upside risks to the baseline inflation forecast are identified. “Hardening prices of services and key intermediates seen in conjunction with rising bank credit, increase in order books, pick-up in capacity utilization and the decline in inventories of raw materials and finished goods in relation to sales suggests that aggregate demand pressures are still imparting an upside to overall inflation. It is critical to address these risks to the inflation outlook resolutely in order to stabilize and anchor inflation expectations, even while recognizing the economy is weak and substantial fiscal tightening is likely in Q4.”
  • Core WPI inflation rose last month.

Bank officials project a downward path of inflation, reaching 8% a year from now and 6% by January 2016.  The statement asserts that “An increase in the policy rate [now] will not only be consistent with the guidance given in the Mid-Quarter Review but also will set the economy securely on the recommended disinflationary path.”  The following forward interest rate guidance is offered:

The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture.

Henceforth, policy reviews will be limited to every other month.  The next is set for April 1.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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