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!!
(may be in) Status Quo (or) Increases!!
I leave this post wide open for readers perception.
