After CPI Nov registering an 11% YoY rise followed by 7.5 % YoY rise of WPI also upward revisions to Aug and Sep WPI nos along with hawkish statements by Rajan only leads to one conclusion, a rate hike tommorrow, 25 or 50 bps is the real question.
Rajan’s statements have been on the hawkish side and rightly so. With inflation rampaging in the economy, theres no way the central bank can take a less hawkish position. He recently pointed to the fundamental question of how demand was more than supply and how the source of inflation was a debatable point. This is because the latest spike was due to spiralling prices of vegetables in particular along with fruits and other animal proteins.
Phailin effect is cited, which damaged some Kharif acreage in Andhra and Odisha. And kharif arrivals is said to bring down prices. And it has in some cases, Onion in particular. Wholesale price have broken the support of Rs 1000 / quintal cited by the farmers in Pimpalgaon APMC. There were protests and blocking of Mumbai – Agra highway following the crash in prices following massive arrivals of onion produce.But, if not onion, it is tomatoes or potato.
Agreed food inflation can be tackled best by the government of the day by strengthening the supply chain, cold storages (remember veggies and fruits are perishables). But thats a long term solution which nobody in the government is interested in. They throw the ball in RBI’s court. This is the best RBI can do. Tighten money. At best it could take steps to steepen the yield curve. So that people can atleast borrow cheap in the short tenure. Government borrowing in the longer end could become dearer so that it is reminded to bring its expenditure under check.
The whole point about real rates being negative gains ground as even WPI is approaching the present repo rate whereas CPI has submerged it in water. Another thing, CPI linked dearness allowances of government employees and labour wages and the subsequent rise in demand which could fuel inflation further.
Rajan is referring to the signalling effect of tightening stance. It should be decisive, either ways. So that there is no confusion in the minds of participants. People would make their decisions accordingly. An assertive, sledgehammer approach is what is required. The ‘baby steps’ approach of Rajan’s predecessor was a disaster. A decisive hike of 50 bps would not be shocking.