RBI’s move to raise repo and reverse repo rates by 25 bps each is a measured response to inflationary pressures that persist in the economy. While business confidence remains positive, the sixth rate rise this year, though moderate, indicates the central bank’s unease with inflation staying well above its target range of 4-4.5 per cent in the short term.
The rate rise also reflects RBI’s stated concern of the risks of structural food inflation spilling over into prices of other commodities when the economy is growing close to trend. In its policy stance, the central bank is conscious that recovery on the domestic front has to be consolidated even as global cues remain weak. The monetary policy review made clear that the likelihood of further rate actions in the immediate future was relatively low. Given the limited amplitude of a rate rise, it is unlikely to have a significant impact on growth and the banking system will absorb the rise smoothly.
