"The current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year," RBI Governor Raghuram Rajan said in his maiden mid-quarter monetary policy review. Retail inflation was at 9.52 per cent last month. Inflation as measured by the wholesale price index was at a six-month high of 6.1 per cent in August, compared with the RBI's comfort level of 4-5 per cent.
To contain inflation, the RBI today hiked the key repo rate, or short-term lending rate, by 25 basis points to 7.5 per cent from 7.25 per cent with immediate effect. "Bringing down inflation to more tolerable levels warrants raising the repo rate by 25 basis points immediately," Rajan said. The action is intended to address inflationary pressures to provide a stable nominal anchor for the economy, he said. "What is equally worrisome is that inflation at the retail level has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence," Rajan said.
He said better prospects of a robust kharif harvest will lead to some moderation in retail inflation, but there is no room for complacency.