Sunday, June 17, 2012

RBI: When In Doubt Pout! And Why They Are Wrong?

RBI today left its key policy rates (Repo / Reverse Repo) and CRR unchanged. While the announced policy is consistent with the strong noise it has been making on keeping inflation rate in check, and given that headline inflation level rose in May, the move was not entirely unexpected.

That said, I do not entirely agree with this policy. In it own words current inflation is due to supply constraints and not necessarily demand driven. Food and Fuel are driving inflation in the mix. Interest rates only have a marginal impact on demand for fuel especially the one that we import. The non-import variety (electricity, coal) need encouragement and support in the form of lower interest rates to keep prices low with higher production

Food inflation, which perhaps is the most sensitive matter, needs improved infrastructure, greater farm equipment etc to fuel growth. By keeping interest rates high the RBI will  likely achieve the opposite.

Core inflation is anyway on a downtrend should have signaled RBI to reduce policy rates. 

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