Mr. Professor while announcing his maiden Monetary Policy Review has almost surprised everyone as he has raised the Policy Repo rate by 25 basis point from 7.25% to 7.5% (Source: RBI). This he has done to tame/control/contain the inflationary pressure both at the Wholesale and the Retail levels. One could have thought that since Fed has decided to hold back its Quantitative Easing Tapering Programme and RBI should ease the tight monetary position in the economy and give impetus to the growth by making funds cheaper for banks. To satisfy the conscious of the Banks he intelligently lowered the Marginal Standing Facility rate by 75 basis point from 10.25% to 9.5% with immediate effect thereby lowering the cost of borrowing for Banks. To increase the rate of Repo has some meaning as Mr. Professor puts forward the argument by saying that households investment in financial instruments is very low because of the fact that returns on their investments are far lower than the inflation in the market which in effect yields them negative returns. So to overcome this problem he has put more influence on dampening the inflationary pressure in the economy with the immediate effect. Another important reason why he is intolerant for inflation compared to his predecessor (D. Subbaroa) is that India needs sustainable growth which is the panacea for all diseases and to have that economy should be accompanied by moderate and healthy inflation not hyperinflation.
Posted on: Fri, 20 Sep 2013 14:33:59 +0000
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