High retail inflation still biggest concern for Raghuram Rajan

The Reserve Bank of India (RBI) Governor Raghuram Rajan has surprised the financial markets with a 25 basis points hike in repo rate to 8 per cent  in the monetary policy review. Rajan has now increased the repo rate by 75 basis points since he took over as Governor in September last year. However, in the last review in December Rajan had kept the repo rate -- the rate at which RBI lends to banks -- unchanged at 7.75 per cent despite high inflation.

Rajan's biggest concern is the elevated retail inflation or the consumer price index (CPI), which is close to double digits. Similarly, the wholesale inflation index (WPI) has declined, but the non -food manufactured products inflation rose in December on an uptick in prices of chemicals , non-metallic minerals  and paper products. "It is critical to address these risks to the inflation outlook  resolutely in order to stabilise  and anchor inflation expectations, even while recognising the economy is weak  and substantial fiscal tightening is likely in the fourth quarter," said the RBI.

The RBI Governor has indicated that over the next 12 months there are upside risks to inflation . "An increase in the policy rate will not only be consistent with the guidance given in the mid quarter review but also will set the economy securely on the recommended disinflationary path," said the RBI.
 
The policy action is also guided by the likely taper of the quantitative easing by the US. The US Federal Reserve had announced in December that it would reduce its monthly bond purchase by $10 billion every month, starting January, in 2014. However, a meeting of the Federal Open Market Committee is scheduled for January 28 to decide whether to continue with the tapering in February or suspend it till there are more signs of the US economy picking up.