Rajan surprises again, aims to tame inflation first

Repo rate hiked to 8 percent, industry disappointed

GN Bureau | January 28, 2014


Raghuram Rajan springs a surprise again as he goes in for rate hike
Raghuram Rajan springs a surprise again as he goes in for rate hike

Going against widespread expectations yet again, Reserve Bank of India (RBI) governor Raghuram Rajan hiked the repo rate by 25 basis points to 8 percent as part of his monetary policy announcement on Tuesday, in light of the inflationary pressures persisting in the economy.

Calling the economic downturn “increasingly worrisome”, Rajan said that growth in the third quarter of the current fiscal was slow due to the subdued performance of the industrial and services sectors.

However, pointing at the robust performance of agriculture, the governor exuded confidence in the easing of inflation levels in the future hinting that further rate hikes would not be required.

During the mid-quarter monetary policy review in December, the apex bank had kept the rates unchanged as the economic indicators, according to Rajan, “were marred by noise”. The present policy decision was in anticipation of the consumer price index (CPI) inflation remaining high. “Although headline inflation has fallen significantly with the substantial fall in vegetable prices, CPI inflation excluding food and fuel has remained flat and WPI inflation excluding food and fuel has risen. Given these data, the increase in the policy rate undertaken today is consistent with the guidance given in the mid-quarter review (of December),” Rajan said.

Meanwhile, the rate hike has come as a dampener to the new year spirits as the industry was expecting at least the interest rates to remain unchanged, if not lowered, so as to spur growth. Calling the decision disappointing, Sidharth Birla, chairman of Xpro India and Ficci president, said, “Growth has been anaemic and investments have been hit hard over the last two years and there are clear signs of contraction in employment opportunities across industries. While overall IIP has been in the negative terrain in the recent past, interest rate sensitive sectors like consumer durables, automobiles and housing and construction have taken a major hit.”

He further said, “At this juncture we need policy support from all directions to get the industrial sector back on track. We hope growth and employment considerations merit greater attention in RBI’s policy decisions in the coming months.”

In addition, Chandrajit Banerjee, director general of industry body CII, said that with economic indicators suggesting that a status quo was in order, the rate hike comes as a surprise. Reiterating that investment sentiment should also be considered by the RBI while deciding the monetary policy, Banerjee said, “India had entered a cycle where high interest rates are leading to subdued demand conditions resulting in lower growth and investment. This in turn is aggravating the supply bottlenecks and adding to inflationary pressures thereby inducing the RBI to hold on to higher interest rates.

“This circularity can be broken through a change in monetary policy stance.  At a time when growth slowdown is getting entrenched across sectors and industrial production is at a low, CII strongly advocates a shift towards an accommodative monetary policy stance, sooner rather than later,” he added.
 

 

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