The question of whether or not RBI should hike policy rates in its quarterly monetary policy review due on January 25 should have been answered rather forcefully by the inflation data for December.
After showing tentative signs of moderation in October and November, wholesale price inflation shot up close to 8.5 per cent on the back of a spike in vegetable prices led by onions and tomatoes.
Even if these prices were to cool off a tad, the prospect of a hike in diesel prices looms on the horizon. The chances of ending the current fiscal year at anywhere near the 5.5 per cent that RBI officially targets seem bleak indeed. The question then is: should RBI stick to its measured approach and push the reverse repo and repo rates up by a quarter of a percentage point or go the whole hog and hike by half a percentage point? It might be tempting for the RBI governor to choose the latter and signal to the markets that he too packs a mean punch. However, by doing that he might just end up "over-compensating" for the other imbalances in the system that play an equally important role in keeping prices high - excessively loose fiscal policy and the woeful state of agriculture that years of neglect has bred. The result could be what economists term "hard landing" or a sharp slowdown in growth. Growth has incidentally started looking fragile again with the November industrial production index registering a growth of just 2.7 per cent. The RBI Governor has to keep the risk of pushing growth off a cliff in mind in deciding January's policy action. A quarter of a percentage point increase in rates should do the trick this time.
After showing tentative signs of moderation in October and November, wholesale price inflation shot up close to 8.5 per cent on the back of a spike in vegetable prices led by onions and tomatoes.
Even if these prices were to cool off a tad, the prospect of a hike in diesel prices looms on the horizon. The chances of ending the current fiscal year at anywhere near the 5.5 per cent that RBI officially targets seem bleak indeed. The question then is: should RBI stick to its measured approach and push the reverse repo and repo rates up by a quarter of a percentage point or go the whole hog and hike by half a percentage point? It might be tempting for the RBI governor to choose the latter and signal to the markets that he too packs a mean punch. However, by doing that he might just end up "over-compensating" for the other imbalances in the system that play an equally important role in keeping prices high - excessively loose fiscal policy and the woeful state of agriculture that years of neglect has bred. The result could be what economists term "hard landing" or a sharp slowdown in growth. Growth has incidentally started looking fragile again with the November industrial production index registering a growth of just 2.7 per cent. The RBI Governor has to keep the risk of pushing growth off a cliff in mind in deciding January's policy action. A quarter of a percentage point increase in rates should do the trick this time.
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