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Caught off-guard, Street sees CPI triggering future policy actions at RBI

Future course will be entirely data-driven, say experts

Salil Panchal
Published: Jan 28, 2014 01:48:46 PM IST
Updated: Jan 28, 2014 03:22:46 PM IST
Caught off-guard, Street sees CPI triggering future policy actions at RBI
Image: Danish Siddiqui / Reuters

The Reserve Bank of India surprised the markets once again on Tuesday, by hiking interest rates by 25 basis points, citing high retail inflation and global concerns. Government bonds and stock prices slid in a knee-jerk reaction, but retraced marginally by noon.

Economists had widely expected the RBI to keep rates on hold as wholesale and retail inflation levels had started to ease. This is the fourth time that the newly -appointed RBI governor Raghuram Rajan caught economists and marketmen on the wrong foot, with the hike in rates.  

Economists, speaking to Forbes, said the future course of monetary policy will solely be driven by data, particularly consumer price inflation, which the central bank wants as the main inflation benchmark.

The CPI eased to a three-month low of 9.87 per cent in December but remains well above the central bank's comfort level. An RBI panle forecasts CPI inflation to come down to six percent by January 2016.

"The future course of monetary policy will be triggered by pressures on the CPI,"said Shubhada Rao, chief economist with Yes Bank, who like most economists had expected the bank to keep rates on hold on Tuesday.

"It will be difficult to take a call on future action,"said Rupa Rege Nitsure, chief economist with state-run Bank of Baroda.

"Policies only when unanticipated make a difference and Rajan appears to be of this view," Nitsure told Forbes India. She said future course of monetary policy will be ëntirely data driven."

Rating agency Crisil's chief economist Dharmakirti Joshi said: "The RBI is signalling its intention to bring the CPI down to 8 percent by the end of 2014."

Rajan has raised rates in three of the four monetary policy meetings he has chaired, saying it was determined to fight inflation, but government and business leaders continue to clamour for a looser monetary policy to help spur a sharply slowing economy. Industrial output shrank 2.1 percent year-on-year in November, the worst performance in six months.

The scandal-tainted Congress-led government is desperate to tame inflation and revive the economy as it seeks a third term in office after national elections due by May.

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