With central banks across the globe hiking the interest rate, the Indian monetary authority has to follow them. Excepting the GDP (gross domestic product) number, most of other critical economy numbers such as inflation, oil price and rupee-dollar rates have forced the RBI to increase the repo rate. Though the central bank has flagged the positive aspects of the Indian domestic economy, it has to factor in a number external concerns while opting to increase the repo rate after a considerable hiatus.
Coming as it did on the eve of the ensuing festival season, the rate hike suggests that the RBI is a lot worried on the rising inflation. The inflation number has already breached the upper limit of the target set by the Reserve Bank of India (plus or minus four per cent). More than anything else, price increase hurts the common man the most. Successive governors of the Reserve Bank of India had never hesitated to publicly acknowledge this. With the Super El Nino effect already playing out on the supply side following a deficit in monsoon, the RBI appears to be a lot concerned. Though it has sounded very positive on the resilience of the Indian economy, it, perhaps, has chosen to be prudent vis-à -vis checking the price impact on the economy. This was apparent when the MPC statement said that deficient south-west monsoon and strong El Nino conditions posted risks to agricultural production. The MPC, however, did laud the efforts of the government in building a healthy buffer of foodgrains and proactive policy interventions.
Though some had suggested that the ensuing festival season would push RBI to at least temporarily postpone the rate hike, the MPC of central bank recommended a rate hike. With the Federal Reserve of the USA and others announcing the rate increase, RBI has little leeway. The rate hikes by other central banks have already started playing out on the rupee value which has wider ramification on a host of critical economic numbers.
Well, the RBI did not have the option at the moment. How will the rate hike play out on growth number going forward? That remains to be seen.