RBI hike in rate shows inflation is still an issue

Those who had been taken by surprise when the Reserve Bank of India hiked the repo rate to eight per cent at its third quarter review of monetary policy recently, have underestimated Governor Raghuram Rajan's determination not to give in to populist measure in the face of the high inflation that continues to trouble the economy. The RBI, since Mr Rajan took over in September last, has hiked the rates on three occasions, and each time the Governor pointed out that the bank did not consider it prudent to lower the interest rates at a time when Consumer Price Index inflation was showing no real sign of abating. Many had believed that Mr Rajan would adopt a different path from that of his predecessor D Subbarao, who had become something of a problem for the UPA Government which had taken the (though categorically unstated) stand that the RBI's repo rates were stifling growth. But Mr Rajan is turning out to be a pragmatic Governor as well — one who is willing to ease the rates if only the Government demonstrates tangible measures to contain inflation. This does not mean that the RBI Governor will continue to play the ‘spoilsport' for all time to come. Indeed, those disappointed with the latest measure can take solace from the possibility that the RBI has done its worst — or the best, depending on one's point of view — and that things can only improve from here on. In other words, another early increase in the repo rate is very unlikely. It is being felt in certain quarters that, with food inflation easing, the RBI has missed an opportunity; it could have at least maintained the repo rate if not reduced it. It is true that food (and to an extent fuel) inflation has gone down over the last three months, but it's equally a fact that headline inflation continues to be a source of worry. The CPI inflation hovers close to 10 per cent, and that, even those who do not agree with Mr Rajan will admit, is not a comfortable level.

The RBI Governor appreciates the imperative of accelerated growth of an economy which has been sluggish over the last five years. But then, the responsibility for the slowdown does not lie with the RBI — and certainly not with Mr Rajan who was not in the picture when the Manmohan Singh-led UPA Government went about destroying an economy that had been growing at an average of more than six per cent when the UPA took over in 2004. With the economy expected to grow at only a little over five per cent this year and high inflation continuing to snap at its heels, we are certainly not out of the woods. It's best to err on the side of caution in such moments. This is what the RBI has done until now. There's no need to get rambunctious.