RBI Fights "Intolerable" Inflation

RBI couldn't have it said it any better. It described the current level of inflation as “Intolerable”. After its quarterly review of monetary policy on 29 July, 2008, it increased the leading purchase rate by 50 basis points to 9.0 percent, the highest level since 2001. This comes as a surprise especially after the leading interest rate being hiked twice already in June 2008. Apart from this, the central bank also increased the Cash Reserve Ratio (CRR) by 25 basis points.

The message that this clearly sends across is that the central bank prioritizes price stability over growth, with inflation running into double digits. Although a hike was expected, the magnitude of increase probably comes as a surprise.

With the RBI stating that the “Tolerable” level for inflation for it is below 5% in the near term and 3% over the medium term, probably a more realistic figure would be around 7% by the end of this fiscal, keeping in mind that this is a demand-led inflation and inflation usually intensifies before it recedes.