Treading a fine balance

Written by Saikat Neogi | Updated: Sep 20 2013, 10:05am hrs
RBI governor Raghuram Rajan's maiden quarterly monetary policy review today comes at a time when the US Federal Reserve has decided to continue with its stimulus programme to revive the world's largest economy and drive global growth in the coming months. The Fed's decision moved the Sensex up by 684 points and the rupee appreciated by 161 paise against the dollar on Thursday. Rajan's policy will indeed be a determining factor and will give some traction to the markets in the near and medium term.

The policy review also comes at a time when the wholesale price index-based inflation in August rose to a six-month high of 6.1% as rise in prices of primary food articles, led by onion, drove the bulk of the upward surprise. Ratings agency Crisil, for instance, has already upped its average WPI inflation forecast for FY14 to a much higher 6.2% from the earlier 5.3%, taking into account the current trends. However, core inflation, which the central bank closely tracks for its monetary policy, has nudged down to 1.9% in August from 2.2% in July because of weak demand in the economy, raising some hope for a surprise cut in the policy rates to boost the economy.

The country's economic growth slipped to 4.4% in the first quarter of the current fiscal, the slowest pace in four years, dragged down by a contraction in manufacturing and mining activities.

While the central bank has reduced the repo rate three times this year, in its last policy review on July 29, it chose to keep all key interest rates unchanged on account of weak rupee. Also, in a move to stem the continuing fall of the rupee, RBI on July 15 increased the Marginal Standing Facility rate to 10.25% from 8.25%. A marginal reduction in the MSF rate can provide some relief to short-term interest rates. The governor will now have to achieve a fine balance between targeting inflation and boosting economic growth.