Article;
RBI raises repo-rate by 25 bps to 8%.
Comment;
Rajan in his latest monetary policy has again surprised
those who forecasted a status quo,… We thought inflation showed a decline in
the recent data therefore our Governor would wait for more data to make sure he
is not over-tightening as the transmission to demand and prices takes time… the
effect of tightening appears with a lag… Rajan’s decision to hike repo-rate was
expected, sooner or later, because a just 50 basis-point hike after our new
governor took office, apart from previous rate hikes, when inflation is
consistently hovering around 10% since a decade now, since 2004, and there is
an upward bias in the face of supply side problems, can not be expected to
bring inflation to 6% or less (a liberal view)… A meager rise (50 basis-points)
in the repo-rate can not bring inflation at 6% or below… If we have an
inflation rate 9 % we need to push-up interest rates atleast 3% (Taylor’s-Rule)... Rajan has took a good turn, a shortcut in
terms of time saving… waiting for more data could lengthen the time taken for
turning high interest rate into lower demand and prices… Rajan has done a smart
thing to cut short prolonged low growth phase due to higher interest rates… As
soon as the inflation comes to the target, the sooner we would be able to push
demand and growth higher to reduce destitution locally and globally… Lower
prices mean more purchasing power for our common-man… And, the CPI is the right
anchor for inflation because people do not buy in the wholesale market…
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