RBI on Inflation

RBI declared increased repo rate and reverse repo rate by 50 basis points and rose to 8% to combat inflationary pressure. It also projected inflation 7% to sustain growth rate of GDP.India will also maintain the targeted fiscal deficit of 4.67% of GDP.It is the 11^th successive hike since 2009 to keep up growth with price stability to go along with the global slow  down.

The policy has the mixed reaction in different sectors of the economy.Some argue that to much increase in interest rate may sabotage growth that leads to a slow down.The present inflation of the economy is more that 10% that created projected GDP growth rate lower than previously assumed.The corporate sectors spokesmen said that this policy will hurt the auto-vehicle industry,company growth rate,slow down industrial investment rate and will affect sensex levels which had  started to fall.The real estate sector will suffer.

On the other hand, the new rate could not help the food price inflationary tendency downwards because the policy has no direct relation to combat food prices coming down.Therefore,the essential commodity prices will not move downward.   

7% inflation expectation with 9% or 8.5% growth rate of GDP is not the ultimate answer to the new policy. The fuel price hike increased the transport costs of all food articles and thereby increased food prices. The wages in agriculture increased which is not kept parity with price level.The contribution of agriculture in GDP is falling continuously. The investment in agriculture is becoming lower except in agricultural service sectors where monetary flow will be less and the market will be in favour  of new policy but could not affect prices of agricultural commodities downward. The dearer loan on housing sector may affect inversely because the real estate are going adverse more than expectation .The inflationary tendency of the industrial sector may reduce but the agricultural price hike could not be controlled through this policy framework. Now, the question of twin monetary   and fiscal policy in context of lower supply of money and higher developmental expenditure with lower non-developmental expenditure of the government may welcome to control the overall macro economic situation.