Against the current
- Live: Hurriyat hardliner Masarat Alam's release rocks Parliament, Cong seeks PM's statement
- Dimapur lynching: On social media, first ‘rape’, then ‘Bangladesh man’
- Seconds before being stabbed, Indian techie called husband to say she was being followed
- Land acquisition debate: ‘They gave us a window, then went back to 1894’
- Beef ban may spell doom for Dharavi leather trade
RBI's decision not to raise rates surprises markets. Lack of a clear inflation target adds to uncertainty.
Consumer price inflation has risen to 11 per cent and the market was expecting a hike in rates, but in its monetary policy announcement, the RBI has left interest rates unchanged. Governor Raghuram Rajan indicated that inflation had risen due to vegetable prices and as core inflation had not risen, interest rates need not respond.
The RBI's policy decision came as a surprise to markets. Rajan has certainly been hawkish on inflation, but it was unlikely that his approach would pull down inflation so quickly — that is, in a period of four months — since monetary policy usually works with a lag of two to eight quarters. In the case of India, higher inflation is due to persistent and entrenched inflationary expectations. This would take time and require a period of positive real interest rates. Consequently, markets expected rates to keep going up till real interest rates reached positive territory. Since they still have not, there will be uncertainty in the market about whether the rate hike cycle has ended, or whether it is likely to continue if core inflation remains above the RBI target of 5-6 per cent. The lack of an announced CPI target has further added uncertainty to the market. Though markets would like to see the rate hike cycle end, it cannot be said that this policy clearly indicates that.