Why RBI is still behind the curve
Why RBI is still behind the curve
Now that the repo rate (at which the Reserve Bank of India, or RBI, lends to banks) has been increased to 5.5%, it matches RBI’s inflation target of 5.5% by the end of March 2011. If we take RBI’s forecast as expected inflation, then the real policy rate, or the rate after adjusting for inflation, is now zero. Most economists differ with RBI and see inflation well above 5.5% by March 2011, which means that even after the hike, the real policy rate remains in negative territory. That is unlikely to deter borrowing and have any impact on growth.
Clearly, therefore, RBI needs to hike rates further. There are, however, some factors that may help it. One of them is the recent deceleration in manufacturing growth, as seen from the HSBC Markit Purchasing Managers’ Index (PMI). Another is slowing exports—they were lower month-on-month in May. And the third could be a levelling off of prices—the Manufacturing PMI index of output prices has fallen from 55.76 in April to 52.14 in June, while the index of input prices has come down dramatically from 65.15 in April to 53.56.
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