This Wednesday at RBI’s mid-quarter review of monetary policy an interest rate hike looks inevitable. One should blame the retail inflation (CPI) which burgeoned to 11.24% in November from 10.17 percent the previous month and not to forget Mr. Raghuram Rajan; an inflation hawk doesn’t believe in ‘Facebook likes’. In its previous two meeting the RBI Governor has made it very clear – he won’t tolerate inflationary pressure on the economy.
Coincidentally, many socio-political analysts suggest unlike previous occasions there won’t be any pressure seen from the central government to cut the interest rate this time since Congress has blamed rise in price as one of the main reason for its poor performance in recently held four state assembly election, especially in Delhi.
To make the job little tricky for the RBI governor the factory output (IIP) contracted by 1.8% in October , down from 2% in September. But almost all polls and surveys had predicted hike in interest rate; possibly one last time in the current cycle. On the global front, the Federal Open Market Committee’s (FOMC) two day meeting will possibly paint new picture on the most expected-predicted-anticipated ‘tapering’ move. Many economists believe March 2014 would be that decisive month for the U.S. Fed to dial back its quantitative easing (QE) policy backed by good economic data. The U.S. Senate is expected to vote for new budget deal which will run till 2016 giving more room for the Fed to dial back its QE.
From RBI’s point of view a possible tapering will impact Indian currency. So far, to check the currency depreciation RBI has curbed speculation on dollar (by hiking interest rate). This month at New York, Raghuram Rajan apprised inflation as a key concern. Market pundits are assured of WPI increase as well which is due to release Today. A higher WPI will concrete interest rate hike decision. Although, ever since Rajan became RBI’s governor, the Central Bank of India has shifted from WPI to CPI as its main guide for monetary policy. So, many market analysts expect hike in interest rate this time.
Its Raghuram Raj for sure!