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For the 13th time in the last 20 months, Reserve Bank of India (RBI) on Tuesday raised the interest rates by 25 basis points (bps), in an effort to rein in inflation. However, in its attempt to do so, it has gone for the common man’s jugular, as home and auto loans are set to soar again.
Subsequently, the repo rate — the rate at which RBI lends to banks — now stands at 8.5 per cent, while the reverse repo rate has been calibrated at 7.5 per cent.
Though the UPA regime has been resorting to tightening of money flow to control price rise, which currently stands at 9.6 per cent, the RBI, which has been doing the dirty job of raising interest rates since February 2010, tried to explain that it has been taken this measure “as both inflation and inflationary expectations remain high. Inflation is broad-based and is above the comfort level of the RBI”.
RBI Governor D Subbarao in his comments after the second quarter review of the current fiscal, described inflation as continuing to “be a major macroeconomic concern”.
At the same time, in what may cause further heartburn to the already burdened common man, the RBI boss indicated that though “the likelihood of a (further) rate action in the December mid-quarter review is relatively low… However, as always, actions will depend on the evolving macroeconomic conditions”.
In simple terms, the Government has said that though the “aam admi” may as of now be spared another rate hike in RBI’s December review, in the long run its decision would be governed solely on the changing economic scenario.
While the RBI has given a clear picture that it would in future be governed as per the prevailing economic scenario (thus keeping the money tightening option open), Finance Minister Pranab Mukherjee also sounded guarded in his reaction, saying that the latest round of rate hike will also have some effect on economic growth.
“I do hope that decision of RBI to enhance the repo rate and reverse-repo rate by 25 basis points would have its impact on inflation. Of course, it would have some impact on growth also,” Mukherjee said immediately after the policy announcement.
Later in a statement though, Mukherjee tried to give a rosier picture, saying that RBI's policy “would help in getting us back to a more comfortable inflation situation soon while leaving scope for growth to pick up in the second half of current fiscal year”.
At the same time, he said, the decision has been taken by RBI to affirm its commitment to tackle inflation as the headline inflation is still high.
Meanwhile, Bharatiya Janata Party (BJP), was quick to pick up holes in the Government's move of resorting to monetary tightening through the RBI.
Senior BJP leader and former Finance Minister Yashwant Sinha accused the UPA of abandoning the responsibility of controlling inflation and putting it “squarely” on the central bank.
“What the Government has done, is that they have abandoned their responsibility of controlling inflation and put it squarely on RBI,” Sinha said.
He said RBI had only the monetary policy under which it can either reduce liquidity or increase interest rates.
“RBI is doing that. But this is complete abdication of responsibility on the part of the Government,” Sinha, who is also the Chairman of the Parliamentary Standing Committee on Finance, said, adding that despite hiking the interest rates 13 times in the recent past, inflation has not come down.
Sinha said the Government's fiscal policy and RBI's monetary policy have to work together to bring down inflation. “But the Government has failed in fiscal policy,” he claimed.
Subsequently, the repo rate — the rate at which RBI lends to banks — now stands at 8.5 per cent, while the reverse repo rate has been calibrated at 7.5 per cent.
Though the UPA regime has been resorting to tightening of money flow to control price rise, which currently stands at 9.6 per cent, the RBI, which has been doing the dirty job of raising interest rates since February 2010, tried to explain that it has been taken this measure “as both inflation and inflationary expectations remain high. Inflation is broad-based and is above the comfort level of the RBI”.
RBI Governor D Subbarao in his comments after the second quarter review of the current fiscal, described inflation as continuing to “be a major macroeconomic concern”.
At the same time, in what may cause further heartburn to the already burdened common man, the RBI boss indicated that though “the likelihood of a (further) rate action in the December mid-quarter review is relatively low… However, as always, actions will depend on the evolving macroeconomic conditions”.
In simple terms, the Government has said that though the “aam admi” may as of now be spared another rate hike in RBI’s December review, in the long run its decision would be governed solely on the changing economic scenario.
While the RBI has given a clear picture that it would in future be governed as per the prevailing economic scenario (thus keeping the money tightening option open), Finance Minister Pranab Mukherjee also sounded guarded in his reaction, saying that the latest round of rate hike will also have some effect on economic growth.
“I do hope that decision of RBI to enhance the repo rate and reverse-repo rate by 25 basis points would have its impact on inflation. Of course, it would have some impact on growth also,” Mukherjee said immediately after the policy announcement.
Later in a statement though, Mukherjee tried to give a rosier picture, saying that RBI's policy “would help in getting us back to a more comfortable inflation situation soon while leaving scope for growth to pick up in the second half of current fiscal year”.
At the same time, he said, the decision has been taken by RBI to affirm its commitment to tackle inflation as the headline inflation is still high.
Meanwhile, Bharatiya Janata Party (BJP), was quick to pick up holes in the Government's move of resorting to monetary tightening through the RBI.
Senior BJP leader and former Finance Minister Yashwant Sinha accused the UPA of abandoning the responsibility of controlling inflation and putting it “squarely” on the central bank.
“What the Government has done, is that they have abandoned their responsibility of controlling inflation and put it squarely on RBI,” Sinha said.
He said RBI had only the monetary policy under which it can either reduce liquidity or increase interest rates.
“RBI is doing that. But this is complete abdication of responsibility on the part of the Government,” Sinha, who is also the Chairman of the Parliamentary Standing Committee on Finance, said, adding that despite hiking the interest rates 13 times in the recent past, inflation has not come down.
Sinha said the Government's fiscal policy and RBI's monetary policy have to work together to bring down inflation. “But the Government has failed in fiscal policy,” he claimed.
