The Reserve Bank of India’s (RBI’s) mid-quarter review of monetary policy is in keeping with the latest trends in the central bank’s policy-making — “expect the unexpected”. Barely a few days ago, RBI reduced the cash reserve ratio by 75 basis points, much to the amusement of the market. The market, this time around, expected a cut in the repo rate by at least 25 basis points with a view to propel economic growth. But RBI didn’t think so. There is more to RBI’s status quo policy than meets the eye. First, the wholesale price index inflation is increasing again — it was at 6.95 per cent in February compared to 6.55 per cent in January. Food inflation rose to 6.1 per cent in February against a contraction of 0.52 per cent in January. And crude oil prices are hovering at $120 a barrel since February. Thus, with headline inflation still not within the RBI’s comfort zone, a status quo on repo rate is just as apt. Even as a repo rate cut would have stimulated credit, and consequently economic growth, a reduction in the repo rate in the time of high inflation does not make a sound monetary policy.
G K Murthy Bangalore
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