Article;
RBI governor Raghuram Rajan likely to hold rates tuesday.
Comment;
I think Rajan should not wait for 2016 to bring inflation
down to 4% because it seems illogical to unnecessary wait for inflation come
down to the target without using interest rate when inflation is sticky around
current level since 2004 in the face of supply-side problems. Inflation (CPI)
has come down to 8.1% in March, 2014 and no doubt we can not expect inflation
to decrease to 6% in 2016 without raising interest-rates. It is inevitable…
Waiting for more data now will only lengthen the rate-hike cycle and low growth
period. The point is, as soon as we will bring inflation down the sooner we
would be able to push for growth by embarking on rate-reduction. I think Urjit
Patel Committee report is right on other occasions but wrong on the inflation
reduction time-table. The Committee report is unnecessary stretching the time
for reducing inflation. As long as inflation remains elevated we need to hike
interest rates, we need to bring it near the target as soon as it happens.
However, the WPI is just above the target 4.6 % and a 25 basis points rate hike
can not be ruled-out and CPI is already elevated… We can expect a hike… But
there is one more factor the rupee which has shown signs of strengthening is
not good for exports. If Rajan hikes interest rates the chances are that the
rupee will become stronger and exports will loose competitiveness… I think
along with increasing interest rates the RBI should also buy foreign exchange
and that will keep exports competitive…
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