Food prices must decline sharply to avoid interest rate hikes
Odds are skewed in favour of rising policy rates, unless food and fuel inflation comes down drastically
Ever since the Urjit Patel panel report was made public, the fear in the market has been that the central bank will target inflation to the exclusion of everything else. In a speech last Wednesday, governor Raghuram Rajan allayed that fear by saying that the Reserve Bank of India (RBI) won’t “administer shock therapy" to a weak economy. He has also turned on those who say that the RBI is not doing enough by pointing to the recession in the US when Federal Reserve chairman Paul Volcker rapidly raised rates. In sum, Rajan has tried to give the impression that he is steering a middle path, by choosing to target a slow and steady fall in inflation, rather than go for the jugular.