In a time of high inflation, the task of any central bank is simple: raise the policy rate. So it has been for the Reserve Bank of India (RBI) since it began its rate-tightening drive in March last year. There were murmurs of “growth is being killed”, every now and then, but the level of inflation and above trend line growth provided sufficient policy guidance.
That situation has changed somewhat in the past month. On the one hand, growth numbers released late last month give reason for caution. The investment figure for the final quarter of the last fiscal paints an alarming picture. RBI’s survey of inflationary expectations for the period April to June provides a reassuring contrast: After one year, inflationary expectations have come down both for the next three months (to 11.9% from 12.4% in the last survey) and the year ahead (to 12.7% from 13.1%).
On the other hand, current inflation continues unabated. The Wholesale Price Index (WPI) data released on Tuesday shows that inflation is close to double digits at 9.1% (on a year-on-year, or y-o-y, basis). That is not all. The WPI figure for March has been revised to 9.68% from the provisional 9.04% reported earlier. For all practical purposes these constant revisions show that actual inflation is in the double-digit range.
The number for non-food manufactured inflation—sensitive to commodity prices and other inputs—has touched the 7.2% (y-o-y) mark. These prices have shown continuous hardening, barring a month in between, since December. In the near future it is quite likely that the government will have to agree to periodic revisions in diesel and other fuel prices if it has to preserve what remains of its fiscal deficit target. These prices will add to inflationary pressures.
If RBI only heeds the positive news and decides to take a pause, it will leave its task incomplete. Inflation is for real: if inflationary expectations have come down that is in no small measure due to the steps that it has taken until now. Given these signals, it is important that RBI continues to send a strong signal about its intention to quell inflation, at least until the end of this year. This means raising the repo rate by 75 basis points (bps) during this time. For now, a 25 bps increase would be in order on Thursday.
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