In a bid to control the surging inflation rate facing the Indian economy, the RBI has gone for some stringent monetary measures. The Reserve Bank of India has raised the repo rate to 8.50 percent with immediate effect from 24th June, 2008.
It may be noted that the repo rate is a 'short -term indicative rate'.
The RBI is also set to raise the Cash Reserve Ratio (CRR) to 8.75 percent. This would be an increment of 50 basis points.
This increment will be implemented in two stages. From 5th July, 2008 the CRR would be 8.50 percent and from 19th July it would be 8.75 per cent.
The RBI has observed that, with a view to anchor in the inflationary expectations in the economy it is imperative that a sustained and heightened vigil be kept over the latest macro- economic and monetary developments in the country.
The idea is to promptly put in place any regulatory monetary policy as and when required.
The RBI has also observed that the the inflationary escalation faced by India in the past week was mostly a 'pass-through' effect of international crude oil prices to India's domestic prices .
The RBI has observed that this pass-through effect has not been on a continuous scale for most developing nations including India. Hence the policy responses also need to be customized for the particular economy in question.
Mature, developed economies display a different responsive model distinct from those in the developing nations in this respect.
Apart from the oil prices, India of late has experienced inflationary pressures from other subgroups of the consumption basket also, as reflected by the different price indexes.
In a nutshell, this increase in repo rate and CRR by the RBI is going to sop up the excess liquidity in the system.
As the agricultural production in India has already picked up and the country possesses a relatively small current account deficit with reasonably good foreign exchange reserves, the need of the hour is calibrated regulatory monetary policy.
It will help to stabilize the market conditions for this emerging Asian superpower.
