Bikky Khosla | 07 Aug, 2018
Citing upside risks to inflation, the Reserve Bank of India
(RBI) last week raised the policy repo rate by 25 basis points to 6.5 percent.
This back-to-back interest rate hike for the first time in almost five years is
also in the background of Rupee depreciation and high oil prices amid rising
trade protectionism and geopolitical tensions. The rate hike has come on
expected lines for the industry, but concerns also followed the decision over
its possible impact on interest rates on loans.
The factors that led to the RBI decision are clear. First,
as mentioned above, relative weakness of the Rupee -- this year, the currency
has already lost over 8 percent of its value. Second, there is concern over the
mounting inflation risk, especially core inflation. It is widely agreed that
uncertainty over domestic inflation needs to be carefully monitored. Third, the
sharp hike in MSP recently may fuel inflation in coming days. Other factors include
loose fiscal policies, farm loan waiver decision by some states and high crude
RBI considers inflation control as one of its major
objective and the last week hike only reflects its caution. But the decision
has raised concern among several industrial sectors. Most significantly, the
realty sector fears that the hike will impact housing sales further. Similarly,
auto sales are likely to be hit directly. At the same time, I think the impact
will be no less harmful on our SME exporters. At a time of unfavourable
condition in our major markets, tight liquidity conditions may further impact
Amid these concerns, some experts are of the view that
export finance should be placed under priority sector lending. Last month, the
Union Commerce Minister said that his ministry was talking to the Finance
Ministry and the RBI in this regard. He even raised the question â âhow do you
say priority of India is export when it is not a priority for lending?â. The
argument sounds good, particularly at a time when a tight monetary policy seems
inevitable to rein in inflation.
I invite your opinions.