Hardening stance

With Tuesday’s 25 basis points increase of the repo to 7.75 per cent, RBI governor Raghuram Rajan has furthered signalled the bank’s hardening stance against wholesale price inflation (WPI), though his predisposition towards signposting retail inflation as a better index of economic health is equally apparent.

 That said, the pressure on the food basket component of the WPI continues, and fuel inflation stays elevated, though the passthrough of rupee depreciation to prices of manufactured products is still a game in progress. These factors will continue to offset any disinflationary effects of the RBI’s latest easing crusade. One would hope that better harvests will help moderate prices, though WPI inflation could stay higher than current levels for the remainder of the year.

With not much policy action to contain retail inflation, it could fare no better in the months ahead. Under the circumstances, RBI has to improve liquidity without it becoming a further incentive for headline inflation. It kept the cash reserve ratio (CRR) unchanged at 4 per cent which has not helped much in the past. Moreover, since the passage of the last monetary policy review on September 20, banks have been encouraged to revive consumer spending through a Rs 14,000-crore capital infusion from the Centre. A good measure which may yield some results has been to infuse more liquidity through 7 and 14-day repos, where the increase of 0.25 per cent of bank NDTLs (Net Demand and Time Liabilities) will total to 0.50 per cent.

Using the additional handle of tweaking overnight rates (which are still high despite the RBI’s measures last time round) by pruning the Marginal Standing Facility (MSF) is a further rollback of measures initiated a couple of months ago to reign in the depreciating rupee. The recent tapering of the US quantitative easing program has been providing temporary succour to the rupee anyway, and the previous easing of the MSF rate has not played a visible role in the uptick of the rupee. One may expect another bout of appreciation in November 2013 when banks rush in deposits from overseas and avail of the swap window provided by RBI till the end of November. This could maintain inflation well above RBI’s ‘comfort zone’ of 5 per cent. Going ahead, it might be time to change the medicine, or at least to raise the apex bank’s comfort zone to more realistic levels.

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