The rate hike was a long awaited decision. It was needed to check the rising prices, pep up the fledgling rupee, redirect the bank finances and help the country correcting its course in a critical year.
It will help the senior citizens and depositors with higher interest accruals and hedge the banks. It can increase savings.
The rate rise has come after four long years and the first during the NDA regime. There were five rate cuts during Raghuram Rajan’s tenure – four of 25 bps and one of 50 bps and two both of 25 bps by Urijit Patel, the last in August 2017
Those who are worried about increase in home and consumer loan rates have little to worry. Most banks, including the SBI, have already raised the lending rates and there is little scope to raise it further.
The decision of the Monetary Policy Committee (MPC) to raise the interest rates by 25 basic points was unanimous stressing that it was a dire need. The minimum interest rate has risen to 6.25 percent
The government has reasons to feel happy. Spiraling prices are never a good indicator. It hits the poor and often is said to be a tax on them. Apart it affects everyone the businesses, industry and the government functioning.
The way the stock market has spurted after the rate hike is an indicator that the decision was appropriate. Markets responded too favourably.
Most importantly it helps the banks. Had the rates not been low possibly the 2007-8 sub-prime crisis in the US-EU would not have taken place. Banks in India too would not have gone into over 80 percent NPA or about Rs 12 lakh crore.
Higher interest rate helps banks. As Indian corporate post-2008 got easy loans, today they are having a tough time and many are taking a heavy hair cut. The rise – rather the practical rate – is always good for the prudent economic functioning.
High rates also are likely to help rupee gain strength, which lost over 4.8 percent. It would attract foreign capital. Lot of it has seen a flight in recent times. Perhaps more such steps and stronger rupee would help India lower its import bill.
The Reserve Bank cited pressures from soaring crude and commodity prices. It estimates inflation to rise to 4.9 percent, touching the RBI tolerance of 5 percent. The central bank retained a neutral stance, signalling it would be flexible in its response to challenges without stifling nascent economic recovery. So it maintained the cash reserve ratio at 6 percent.
It raised the inflation forecast for the fiscal year amid core inflation remaining stubbornly firm even though the threat from food prices had eased. The RBI step is an indication that if the inflation does not sober down it might further raise the rates to keep the economy on track.
For the monetary authorities inflation inflicts a real cost on the economy as its major burden is borne by the poor, which eventually leads to distributional inequalities – social inequity. Also, persistently high inflation beyond a particular threshold level could pose serious challenges to growth in the long-run.
The RBI this time has tried to correct this as since August 2017, there had not been any rate tinkering despite pressures on prices and some slowing down though the GDP figures hovered around 7 percent.
It is signal for the government also to take steps to contain prices of many of its products and services. Each move of a government utility service impacts the price situation. Prices are needed to be contained also for the purpose of overall happiness of the people. Ancient economist Chanakya had said that if the people were happy so would be the king.
Of late, some government departments apparently have stance which is contrary to the stated position of the government. It is logical that if price of commodities in international market falls, the benefit should be passed on to the consumer. It is not happening in the case of either the petroleum products or gas. The RBI virtually has expressed its displeasure on the issue. There certainly has been a marginal rise in the cost of Indian basket for oil. It has risen to $ 74. Coupled it with the retail rates are not in a happy state.
The RBI policy has indicated a correction for the petroleum product and gas prices. Though the central bank was less vocal on it, but its disapproval was evident. It hits the government itself. Take the Ujjwala. The gas prices have shot up to Rs 750 from Rs 350 three years back. It entails cost on the government and beneficiaries despite the direct benefit transfer (DBT) or the subsidy paid to the four crore new families who have got the connenction.
Similarly, the MPC was eloquent on many other like the railway fares being increased indirectly through the dynamic fare mechanism, higher platform ticket cost and denial of many concessions.
It has to take a call on many other services like toll roads, various other tolls and levies. The road cess on petrol continues apart from the high taxes and unnecessary hike of daily prices. It has hit the transportation cost at every level and the consequent impact on prices even of many food items. If the price of petroleum products are reduced, the benefits would be passed on to the consumer as after the GST, prices of many commodities were lowered despite levy at 28 percent, one of the highest rates
The highway toll pricing is irrational. The NHAI could not justify its annual 5 to 10 percent hike. The ground of linking it to inflation is flimsy. Tolls cannot be linked to inflation. Toll is levied to recover the construction cost. Each year the balance gets reduced but profits of NHAI and it concessionaire soars.
So there are grounds for reducing tolls up to 75 percent on most highways. It means that much reduction on transportation cost and inflationary pressure. Why is the nation ignoring this?
It also means that despite such adverse conditions, as the RBI notes, economic activity has shown sustained revival and the latest CSO figures indicate last quarter growth of 2017-18 at 7.7 percent. With favourable pricing the growth can accelerate.
(Views expressed are personal)