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Journalism of Courage
In the mid-year credit policy announced on Tuesday, RBI Governor Y.V. Reddy has focused on two interlinked elements of the Indian economy: one, the developments on the external sector, and two, the danger of higher inflation. Governor Reddy has, correctly, said that policy needs to align itself to an economy in transition that is opening up. He has raised the reverse repo rate 8212; the interest rate that banks receive from the RBI when they park their funds with the RBI 8212; by 25 basis points, from 5 per cent to 5.25 per cent. RBI hopes that the hike will contain the inflation rate between 5 to 5.5 per cent.
RBI8217;s analysis that the hike in global oil prices has not been passed on and can lead to inflationary expectations has prompted the focus on inflation. The second important factor is the rising trade deficit, which is today 6 per cent of GDP, and the current account deficit, which is 3 per cent of GDP. The pressure on the rupee to depreciate will build up if the current account continues to witness a deficit. Depreciation of the rupee means higher import prices and this could mean higher rupee prices of imported oil.
