RBI’s decision to hike CRR by 25 basis points (bps) and repo rate by 50 bps clearly highlights the central bank’ s seriousness to control inflation. The RBI has set a target of 7% by the end of the fiscal.
It seems an achievable target towards the end of the year but on an average basis, it seems an optimistic number. Rising inflation over the past many weeks has created higher expectation of inflation which is distorting India’s economic equation making investors across the globe wary of staying invested in India.
RBI’s aggressive policy stance on inflation will go a long way in establishing credibility of an independent central bank and help in receding some doubts on macro economic front.
Current inflation levels of 11% are creating a dent in overall balance sheet of the government coupled with all consumers being hit hard be it retail customers or industries. RBI is still hoping that such high levels of inflation will not impact growth adversely and aims for 8% GDP growth. However, such levels could be achieved more due to statistical reasons (decision of pay hike in sixth pay commission will add 0.5% to the GDP) than structural reasons.
Another factor that needs attention is the component of WPI figures are not revised for long. For instance rubber, tyre, chemical and fertilisers are not revised since the beginning of this year and hence WPI figures do not display a true inflationary picture. If the revision is considered the inflationary pressure could further go up. This probably explains the aggressive policy stance of the RBI. This high inflation coupled with off budget items like farm loan waiver, and subsidies will worsen the deficit levels.
From the economy level, handling these issues actively is critical to restore confidence in the long term India story.
In fact, current policy stance is an example of the same which could create some short term pains but on the long term basis it will add to the overall growth of the economy.
—The author is deputy managing director, ICICI Prudential Mutual Fund
