In line with market expectations, the Reserve Bank of India (RBI) on September 30 announced a 50 basis points hike in the repo rate stepping up its fight against persistently high inflation.

Repo is the rate at which the central bank lends short-term funds to banks. One bps is one-hundredth of a percentage point. With the latest rate hike, the repo rate now stands at 5.9%.

Announcing the policy decision, RBI Governor Shaktikanta Das highlighted the worry of the rate-setting panel on inflation and said the central bank is watching the price situation closely. Out of the six policy members, five voted in favour of a 50 bps rate hike, Das said.

There are upside risks to food prices and lower sowing has upped price pressures, Das said. "These risks to food inflation will have adverse impact on inflation expectations," Das said.

During his address, Das refused to give any forward guidance on policy rates but said the policy decisions going ahead will be calibrated to the incoming data.

Inflation projection is retained at 6.7 per cent for the current year, Das said, adding inflation is likely to fall to 5 per cent levels by first quarter of next fiscal year. In the second half of this fiscal year, inflation is likely to remain at 6 per cent, Das said.

Monetary policy has to carry forward its calibrated actions consistent with evolving dynamics in the economy, Das said. "It must remain alter and nimble," Das said.

Das said the Monetary Policy Committee (MPC), the rate-setting panel, is of the view that persistently high inflation necessitates 'a calibrated withdrawal', which means that further rate hikes aren't ruled out.  Inflation continued to be a concern in the economy, Das said.

Focus on 'calibrated withdrawal'

It is pertinent to note that the Governor didn't hint at a 'neutral' stance, instead chose to stick to the calibrated withdrawal to highlight the fact that MPC remains hawkish on the overall policy approach.

Retail inflation, as measured by the consumer price index (CPI), swelled to 7 percent in August up from 6.71 percent in July. The MPC (monetary policy committee) is close to formally admitting its failure in failing its inflation mandate by end-September.

Under the rules, the MPC has to keep inflation in a 2-6 percent band. High inflation in the economy on the ground takes away the affordability of poor segments in the society to purchase goods and services.

In a situation when growth is stagnant, unemployment is high and inflation remains persistently high, this leads to a tricky economic situation that the economists call stagflation.

According to economists, if inflation-growth situation doesn’t improve going ahead, India, too, might face the prospects of stagflation going ahead, probably by the end of next fiscal year.

The RBI's monetary policy committee (MPC) has already hiked the key policy rate by 190 bps since May to 5.9%.

Das said the RBI is constantly monitoring the liquidity situation and will conduct variable repo rate auctions to infuse liquidity in the system, adding the liquidity infusion will continue as per the situation demands.

On Rupee, Das said Indian Rupee has depreciated in an orderly manner compared to other global currencies. A stable exchange rate is a beacon for stable economy, Das said.

The RBI has no fixed exchange rate in mind and it intervenes in the market only to curb excess volatility, Das said. "Our interventions in the forex market is based on the continuous assessment of the evolving situation" Das said.

(Source:Money Control)