VIEW: It should wait and watch

The Reserve Bank will meet to review credit policy today, when it will consider a fresh tightening of monetary policy by hiking interest rates. But hiking rates any further may not work because inflation this time has been caused more by external factors ��� oil mainly ��� than by internal ones. The RBI has already effected monetary tightening with two repo and one cash reserve ratio (CRR) rate hikes in recent months.Time now to step off the pedal a bit and adopt a wait-and-watch policy.
Inflation, rightly, is the primary target for the monetary authorities. It should also be the basis for any decision taken by the central bank. But oil prices have eased over the past 10 days. At $120 a barrel, the decline of almost $25 is significant. If consumption slows further, prices could come down more. So, if inflation is largely caused by imported oil price spikes ��� though not passed on fully to the consumer yet ��� there is every chance that inflation will cool off correspondingly. Indeed, last Friday's figure for inflation suggests precisely such a slowdown in the rate of climb.
Besides, the two previous repo rate hikes have yet to make their way into the system. The deputy chairman of the Planning Commission, Montek Singh Ahluwalia, expects inflation to cool off soon as past repo and CRR hikes have had the desired impact. It's worth remembering on the other hand that tight monetary measures of recent months will choke off growth a bit. Industrial growth has slowed mainly in the interest-sensitive sectors. A FICCI study has found that current inflation, rooted in primary articles, food and minerals, may be insensitive to interest rate hikes. This suggests that a further interest rate hike or squeeze in bank credit will not be effective in bringing inflation down.
The way forward for RBI, at this point in time, may be not to raise rates but to let the rupee appreciate a bit. That could bring the inflation rates down by cutting down on the cost of imports and sucking some rupees out of the system. Increasing interest rates now might worsen the existing situation.
COUNTER VIEW: Another interest rate hike necessary