It's back in news. Yes, Inflation is back again in the headlines only difference is this time with the RBI policy. The Wholesale Annual Inflation was 9.72 percent in September, which had made RBI to again rise its policy rate by 25 basis points . The RBI on Tuesday hiked its policy lending rate, the repo rate, by 25 basis point to 8.50 per cent. This means that the reverse repo rate, at which RBI drains excess liquidity from the economy, will also be increased by same basis point to 7.50 percent (as per the RBI policy rate the corridor of one percentage point is maintained between the two). This also means that the Marginal Standing Facility (MSF) will stands adjusted at 9.50 percent.
RBI says that the Stance of Monetary Policy is Intended to
- Maintain an interest rate environment to contain inflation and anchor inflation expectations
- Stimulate investment activity to support raising the trend of growth
- Manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission
RBI had not only hiked its prime lending rate but also it had lowered its growth forecast from 8% to 7.6% fro the current fiscal year. It came with the supportive statement by citing the slowing world economy and declining domestic growth. Surprisingly, it had retained the fiscal year-end projection of inflation at 7%.
My Reflection
First, after reading the RBI's second quarter review, I asked myself that, Do you think RBI's policy will have any impact on Inflation? The immediate answer (like many of the people, I think) was NO. Another interesting point which I would like to reflect here is on the policy stance which RBI had mentioned that "Stimulate investment activity to support raising the trend of growth". I really doubt this RBI policy stance, that by increasing interest rate one can stimulate the investment activity in the economy.
Second, last month in the post titled "RBI's Goodwill at Stake" it was clearly mentioned how often RBI changes its own stance from one forecast to other. The recent Second Quarter Review of Monetary Policy 2011-12 by RBI proves the same.
Third, is inflation still monetary phenomenon in India? I feel that RBI policies had failed to reflect the real pulse of the economy.
