Economy and Business

No proof required: Case for an inter-meeting rate hike

A ‘rate hike in time is just fine’ is a wise RBI saying. With CPI inflation at near-historic lows, this must mean, according to the RBI law of mean reversion, that the future will bring high inflation. Hence, the urgent need for intervention
Mar 18, 2017
If Modi does not do large “in the name of the poor” deficit spending a la the Congress, he will be in danger of being accused of “suit-boot ki sarkar” by Rahul Gandhi and will likely lose the 2019 election. Illustration: C R Sasikumar
At the February 8 Monetary Policy Committee (MPC) meeting, the RBI surprised the world, and itself, by keeping the repo rate constant at 6.25 per cent — and by changing the policy stance to neutral from accommodative. Many (all?) criticised this decision as not grounded in economic reality; indeed, I titled my criticism ‘Jaywalking at the RBI’ (IE, February 25).
Economic and political events over the last month suggest that the RBI was right, and the critics wrong. Through this article, I tender my apology to the RBI for not seeing how right they were in their decision. Indeed, the data suggests that the time has come for the RBI and the MPC to raise the policy rate by 25 bp to 6.5 per cent. Recall that unexpectedly, the RBI reduced the repo rate to 6.25 per cent in October 2016, presumably much against its own instincts and under pressure from the ministry of finance. At both the post-demonetisation meetings in December and February, the RBI boldly asserted its independence from the Modi government (and from the world) by not cutting the policy rate any further. It can now fulfil its independence mission by raising the policy rate back to 6.5 per cent: The best way to do it is obviously via an inter-meeting rate hike — as the old Indian saying goes, why wait until tomorrow for what you can do today.
Read more at :-
Indian Express, March 18, 2017

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