September Wholesale Price Inflation (WPI) revealed late on Friday are ugly. They have come in at a 7 month high of 6.46%, as against an expectation of around 6% by economists and analysts. The July WPI inflation was also revised higher to 5.86%, from 5.75%.
What is worse is that the Consumer Price Inflation (CPI) has come in at 9.84%, which is almost near double digits. This makes matters complicated for new RBI Governor Raghuram Rajan, who, in the past has hinted that his top priority would be to battle inflation.
With the new Governor already calming the nerves of the forex markets and the rupee becoming more stable, the focus would now be on inflation.
The one tool that the RBI has used in the past has been the repo rate. It is the rate at which the RBI lends to banks and increase in these rates are likely to happen once again to battle inflation.
The RBI Monetary Policy is set for Oct 29 and it is most likely that the RBI Governor would announce a hike of 0.25 basis points hike in the repo rate.
Last month the RBI hiked the repo rate, while reducing the marginal standing facility for banks, to ensure liquidity in the banking system.
It's likely that the RBI is likely to do the same once again this month, as inflation is posing fresh concerns. However, it's possible that inflation may cool-off in the coming months, as food prices ease and the RBI might not want to cut policy rates to aggressively.
Increasing the repo rate too often may lead to a subtle increase in interest rates, at a time when economic growth has fallen sharply.