RBI tightens rates further to curb inflation

RBI raised its rates further in wake of rising inflation. It has taken two rate actions:

1. Repo rate increased from 8.00% to 8.50%.

2. CRR increased by 50 bps from 8.25% to 8.75% in 2 stages. From July 5, 2008 – 8.50% and from July 19, 2008 – 8.75%

 The inflation scenario:

  2008 2007
WPI 11.05 4.28
WPI minus fuel 9.61 5.92
WPI minus fuel and food 10.33 6.33
CPI-Industrial Workers 7.81 6.67
CPI-Urban non manual employees 6.99 7.74
CPI-Agricultural Labour 9.11 8.22
CPI-Rural labour 8.84 7.9

(Note: The period of inflation figures differs, See the press release.

The surprsing part is prices have increased substanbtially at wholesale level but at consumer level, not as dframatic.  This could have been true if prices were not being passed to the consumers. The companies might not do so as they may be wary of competition. However, this is not true as most prices are being passed on to the consumers. Some companies have not raised prices but have lowered quantity  offered for the same pricew. The net effect is same- higher spend by consumers for one unit of input. So clearly, it is not being reflected properly in consumer preice indices.

As I have said on numerous counts, Consumer price index has to be revamped urgently. However, it is not asn easy task, Dr. Pronab Sen’s (Chief Chief Statistician of India) recent interviews indicate (see this).

RBI points all indicators of money supply have been growing at a much faster rate than indicated:

  2008 2007 Target
M3 21.4 21 16.5-17.0
Reserve Money 28.5 24.6  
Deposits 23.2   17
Non-food credit 26.2   20

(Note: Target as per Annual Monetary Policy 2008-09)

I don’t know what is this talk of slowdown in growth. All the money numbers indicate high growth.

I also checked 1995 interest rates as at that time inflation had touched 11%. We have surely matured as interest rates (lending, deposit, G-sec yields) were much higher then. So, despite the similar kinds of inflation numbers, interest rates haven’t touched similar levels. But again, that is not a point of comfort as we know markets can always surprise you. So, expect more actions if inflation doesn’t come down.

PS.
Finance Ministry has also issued a statement on the repo rate hike trying to calm the conditions.  

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