Inflation may be inching down, but the central bank is not ready to drop the guard against an expected price rise.Raising the red flag over an anticipated spike in prices in the near term, the Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel on Wednesday hiked the benchmark interest rate by 25 basis points.Interestingly, despite the fear of an inflation shock, the monetary policy stance has been kept unchanged at neutral.While raising the red flag over the spike in crude oil prices, the MPC said trade tensions and higher input prices could also have a spiralling effect on inflation in the December quarter.
The other factor to watch out is the impact of the hike in support prices for farmers.The good news is that the GDP growth projection for the current fiscal have been kept intact at 7.4%.
On the rural front, the MPC says there are signals of a demand revival, as indicated by robust sales of tractors and two-wheelers.However, a slightly deficient monsoon shower could have a dampening effect on the economy.On ET NOWs India Development Debate, economists and banking experts discussed the RBIs bitter pill for the economy.
Here are some key takeaways:PANEL VIEWV ANANTHA NAGESWARANINDEPENDENT CONSULTANT, VANSIGHT CONSULTINGThe primary objective of rate hike still remains inflation.
This is a pre-nuptial insurance that the RBI has taken out against dollar strength which could come because of Federal Reserve might end up rising rate.
Today, they might not do anything on interest rates but Powell has spoken about a gradual rate increase for now.
At one point of time they might increase rate by 50 bps and there could be some stampede for emerging markets in which case a rate buffer would help as Indonesia and Philippines are doing.MYTHILI BHUSNURMATHCONSULTING EDITOR, ET NOWRBI has accepted and Viral Acharya admitted as much that monetary transmission in India is not remotely efficient as it should be and thats why they have done the hike, because it will take time for the signal to be passed on through the system.
IMF had recently lowered the estimate for growth for this year.
I think 7.4% might prove to be an overestimate, particularly if exports dont pick up.KAUSHIK DASINDIA CHIEF ECONOMIST, DEUTSCHE BANKRBI would need to be cautious if oil prices are higher and currency is depreciating.
At this point of time, you have to keep an eye on how Chinese currency is moving.
Markets will not react.
Its not a question of macro stability versus growth.
RBI has done a good thing by hiking the rate.
I dont see negative sentiments from the investment community.
We are preparing for a pickup in investment cycle.
We are looking at 7.4% growth.KEKI M MISTRYVC, HDFC LTDThe macro-economic environment in India is not great.
Oil prices and food prices are going up.
We hear there is initial sign of pick up in investment cycle.
Investments will continue to happen.
The growth rate that RBI is projecting is achievable.
It depends on so many factors.
We have elections coming up.
That will create uncertainty.
We dont know what will happen to food prices.
The US is increasing rates and if India doesnt, you will see massive flow of money to outside.