RBI's Third Quarter Review and Rational behind it

Recently RBI had announced its Third Quarter Review (for Full review of TQR Click here). Many analysts, economist and markets were surprised of its announcement because it has raised the Repo Rate by 25 basis points. RBI had said that from next announcement it will follow Dr. Urjit Patel Committee reports recommendation. But, when one reads the policy he will definitely see that even this quarter review announcement of RBI seems to be based on Committee report; because it talks more about CPI (whereas in its earlier policies it use to mention both CPI as well as WPI).

Let us have a look what is some rationale behind the hike of Repo rate. If one sees the graph above then one will see the main rationale behind the policy, as it says, is inflation control, is absolutely right and acceptable. But when one read the graph carefully then one will see when WPI had fallen (which was the lamp post for earlier policies) then Repo rate should have also reduced which never happened (RBI cities due to other reasons for it- which is not clear). In November 2013 there was little hike in Inflation where policy and inflation almost same and in December the inflation had fallen. The present hike is based on the December inflation, but not on the basis of WPI but CPI.

Those who are good at IS-LM Space of Monetary Policy will understand the above graph easily. For others here are the basic 3 conditions 

   1.   Price  Increases – Demand Increases - Interest Rate Increases

   2.   Price  Decreases – Demand Decreases -  Interest Rate Decreases

   3. Price Increases – Demand Decreases - Interest Rate
   (may be in) Status Quo (or) Increases!!

I leave this post wide open for readers perception.