Pressure is mounting on RBI to effect reduction in Repo rate. Recent trends in the trajectory of inflation and quarterly growth rates are cited as arguments that call for immediate cheapening of credit.
RBI Governor has frequently stated with a lot of justification that likely inflation rates in future are more important than past and present rates as inputs for deciding on Repo rates. There are many indicators pointing towards likely upward trend in inflation.
Deficient monsoon causes concern, if not panic as of now, on the agricultural front. Food inflation cannot but shoot up. With OPEC deciding to flex its muscles, oil prices are only waiting for an event to justify upward movement. ISIS would readily oblige. Wages are likely to escalate. With OROP in place, similar demands from non-defence personnel are likely to mount pressure on the government. 7th Pay Commission report which is keenly awaited will push up salaries of central government staff with a percolating effect throughout the economy. In sum, there is no reason for inflation not to perk up.
Costly credit is not the reason for slackness in production. Overall demand is sluggish. Banks are doubly careful in lending thanks to toxic levels of NPAs.
Decrease in Repo rate in such circumstances may please the government but will not be economically prudent. Reduced rates will only act as a disincentive to savings without triggering any surge in output. In addition, it will further weaken the external value of Rupee.
RBI Governor has frequently stated with a lot of justification that likely inflation rates in future are more important than past and present rates as inputs for deciding on Repo rates. There are many indicators pointing towards likely upward trend in inflation.
Deficient monsoon causes concern, if not panic as of now, on the agricultural front. Food inflation cannot but shoot up. With OPEC deciding to flex its muscles, oil prices are only waiting for an event to justify upward movement. ISIS would readily oblige. Wages are likely to escalate. With OROP in place, similar demands from non-defence personnel are likely to mount pressure on the government. 7th Pay Commission report which is keenly awaited will push up salaries of central government staff with a percolating effect throughout the economy. In sum, there is no reason for inflation not to perk up.
Costly credit is not the reason for slackness in production. Overall demand is sluggish. Banks are doubly careful in lending thanks to toxic levels of NPAs.
Decrease in Repo rate in such circumstances may please the government but will not be economically prudent. Reduced rates will only act as a disincentive to savings without triggering any surge in output. In addition, it will further weaken the external value of Rupee.
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