Sep 14, 2013, 05.17 PM IST
As long the overnight rate is pegged at 10.25 percent, probably an increase in the repo rate is not warranted.
I feel that monetary stability is at the heart of Raghuram Rajan's thinking process. Clearly inflation is one part of it, but there could be potentially other aspects to this as well.
It is a slightly complex task to reduce marginal standing facility (MSF) and raise repo rate. There are too many variables at play here. First of all, the fact that the rapid depreciation of the rupee is going to put some upward pressure on the prices domestically across the board. We have seen some evidence of that. The automakers have started raising their prices and there are upward pressures on some of the other commodity prices as well. So that clearly tells you that the inflation pressure is not going to go away in a hurry. At the same point in time, there is this commitment that these measures that have been taken where the overnight rate has been increased by almost 300 bps are temporary. So at some point they need to be unwound.
My perception on this one is that probably if we see some stability in the rupee between now and the date of the monetary policy announcement, we could see partial rollback of these measures. The 10.25 percent rate could be stepped back a little bit but I do feel that we are probably looking at a longer horizon of timeframe for which these measures can be played.
My view is that as long as these measures are there and as long as we have the overnight rate, which is pegged at 10.25 percent, probably an increase in the repo rate is not warranted at this stage. I think it is tight enough and it is high enough short-term interest rate for you to do anything else for inflation management at this point in time.
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