The Reserve Bank of India (RBI) shot another bullet to slay rising inflation on Friday, announcing a mid-cycle rate hike. The question now is: how many more bullets will it take to kill this monster?
In raising its two interest rates—but leaving the cash reserve ratio intact—the central bank’s signals are clear. It doesn’t want to tinker with liquidity that got strained when telecom companies had to borrow cash last month. It is instead worried about the broader economy.
And there is much to be worried about. Wholesale price inflation has crossed the 10% mark, last week’s fuel decontrol surely adding pressure. A roaring economy is pushing price levels up.
Yet, the last time inflation and growth were as high (in mid-2008), RBI’s effective policy rate was around 8%. It now stands at 5.5%. By that measure, there are still many rounds left, assuming RBI has the gumption to keep pulling the trigger, and assuming this will help.