Rajan rules out policy tightening in near-term

The Reserve Bank of India (RBI), on Tuesday, increased the indicative policy rate (repo) by 25 basis points to 8 per cent to tame inflation. However, it is not necessary that banks will increase deposit as well as lending rates immediately or uniformly.

Repo is the rate at which banks borrow short-term funds from the RBI.

“The slowdown in the economy is getting increasingly worrisome... (but) the gravest risk to the value of the rupee is from Consumer Price Index (CPI) inflation, which remains elevated, at close to double-digit, despite the anticipated disinflation in vegetable and fruit prices,” RBI Governor Raghuram Rajan said at a press conference here as he reviewed the third quarter monetary policy.

Moreover, inflation, excluding food and fuel, had also been high, especially in services, indicative of wage pressures and other second-round effects, the RBI Governor said.

“Elevated levels of inflation erode household budgets, and constrict the purchasing power of consumers. This, in turn, discourages investment and weakens growth. High inflation weakens the rupee. Inflation is also a tax that is grossly inequitable, falling hardest on the very poor.”

It was only by bringing down inflation to a low and stable level that monetary policy could contribute to reviving consumption and investment in a sustainable way, Dr. Rajan said.

“The so-called trade-off between inflation and growth is a false trade-off in the long-run,” he added.

He said it was possible to bring inflation under control without a substantial sacrifice of short-term growth, provided “we do what is necessary and are patient.”

He said policy tightening in the near-term was not anticipated.

In fact, “if inflation eases at a pace faster than we currently anticipate and reduction is expected to be sustained, the RBI will have room to become more accommodative.”

Aditya Puri, Managing Director of HDFC Bank, said: “If inflation is expected to come down as everybody expects [it] to come down….the trend probably is not for a rise in interest rates.”

Arundhati Bhattacharya, Chairperson of State Bank of India, said: “While the Governor has increased the rates, he has clearly said this might be the end of the tightening cycle. I think we must not lose sight of that very important announcement. If things work out as per the RBI’s expectations, the RBI will have space for a more accommodative stance.”

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