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Is another rate hike necessary?


Is another rate hike necessary?
Central bank's monetary policy review is due on Friday, September 16, where Reserve Bank of India (RBI) will release the mid-quarter review of Monetary Policy.

The RBI with its anti-inflationary stance has raised key policy rates 11 times since March 2010 by 325 basis points i.e. from 4.75% lows to 8%, the ceaseless move which has not tamed sticky inflation but has definitely weakened the growth.

The July inflation stood high at 9.22% and August inflation is expected to release by the government later in a day, where estimates say it will be as high as 9.7%. High inflation numbers will again hurt India's gloomy growth story.

But the central question is, 'Is another rate hike necessary?"

No, it is really not necessary. There are multiple reasons for that.

Laggard Growth: While GDP has declined to from 8% to 7.7% for the second quarter in a row in April-June and another rate hike might have severe implications.

Industrial Production: Industrial Production Growth has already dipped from 6.6% in June to 3.3% in July due to companies rising borrowing cost in line with rising interest rates.

Currency fluctuations: Rupee is under continuous pressure from dollar, which has already made imports expensive for Indian government. India is world's largest importer of pulses, cooking oil and fertilizers, which could again aggravate rising food inflation. Depreciating rupee also have an adverse impact on India's crude oil imports, making crude expensive, thus fuelling more inflation.

Global financial crisis: There is a fear that developed economies are heading for another recession and global financial crisis have already hurt the sentiments of emerging economies including India. A series of bad news coming from western regions is also another very factor putting pressure on Indian companies, having their sales impacted.

Therefore, considering all the reasons that are stated above another rate hike could have an untoward impact on Indian economy.

Story first published: Wednesday, September 14, 2011, 11:16 [IST]
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