In recent years, India’s central bank has had a tough time fighting inflation. Inflation measured by the Wholesale Price Index (WPI) is within the Reserve Bank of India’s (RBI’s) zone of acceptance. But that is cold comfort as other factors have intervened. Room for a rate cut remains very limited.
June retail inflation was close to double digits at 9.87%, five percentage points higher than WPI for the same period. Add the external account imbalance and it’s an inflammable macroeconomic mix. Forget a rate cut, a rate hike is what India needs.
This does not mean the country’s severe growth contraction does not need to be addressed, just that the burden of that task, as always, rests on the government.
RBI needs to focus on fighting inflation and getting the macroeconomic fundamentals right. An interest rate increase is the medicine for that malady.