Calculated risk

The Reserve Bank of India’s (RBI) decision to raise the repo rate and reverse repo rate as part of its mid-term monetary policy will have a mixed impact on the economy and on individuals. While the apex bank’s latest move is a part of the series of rate hikes it initiated since the beginning of 2010, the underlying objective behind the small doses of rate hikes is to control inflation without harming the growth of the economy. Though the inflation continues to rule high — it stood at 8.5 per cent last month — the positive impact of RBI’s strategy is already visible: despite the hardening of interest rates the Indian economy’s growth momentum has not slowed down. This has helped RBI take the calculated risk of tightening liquidity without harming business activities.

Many in the banking circle were expecting RBI to take stronger measures considering the rapid increase in inflation rates. But RBI’s move was a clear signal that it will continue to pursue the anti-inflationary policy in a calibrated way. This also gives rise to the possibility that we are going to see more rate hikes, in small doses, in the future. It’s certainly the right policy prescription for the moment as it is aimed at maintaining a balance between price rise and growth. While containing inflation is important, the cost of money must not be pushed up so much that the industry and the business start to groan.

As far as individuals are concerned, the RBI’s move will be a mixed bag. The investors in bank deposits will certainly get more interest on their savings helping them beat the inflation. But those who want to borrow money for buying a home or a car, will have to fork out more by way of interest. The factors that worked in RBI’s favour, of course, are good monsoon in most parts of the country, prospects of bumper agricultural production resulting in softening of food inflation rates. But, at the same time there are several risk factors which may impact growth and lead to higher inflation. As the Indian recovery is being driven by domestic demand, a sluggish global environment could have an adverse impact. The possibility of a double dip recession in the developed countries, specially in the US and in Europe, can again slow down India’s economic growth in the near future.