A blow to the aam aadmi

The Reserve Bank has dealt a knockout blow to the poor and the middle class who will see their EMIs on home, car or personal loans shoot up. In a bid to stick closer to the four per cent targeted inflation rate he sees as sacrosanct, RBI governor Urjit Patel on Wednesday announced a 25 basis point hike in the repo rate (that at which the RBI lends to banks).

It must be seen how much of this is passed on to consumers. Some banks like State Bank of India had earlier hiked fixed deposit rates, perhaps in the hope of a status quo on rates.

It's interesting to note that what India has is primarily imported inflation, like crude prices, and volatile global financial markets that put pressure on the rupee.

India is a net oil importer, so it's difficult to see how the repo rate hike will curb such inflation.

The domestic risks to inflation like expensive input costs which traders pass on to consumer is a challenge to the governnent to check profiteering, especially where traders don't pass on GST cuts to consumers. Inflation headwinds can be mitigated somewhat by the cut in Goods and Services Tax rates and a good monsoon. Some feel the RBI should have paused as this could trip the incipient rise in private investment.

Capacity utilisation is at 74 per cent and this could be increased as the demand for consumer durables and non-durables rises. There's also been pickup in rural demand. One hopes this rate hike won't dampen this revival, even though the RBI sees growth keeping its momentum at 7.4  per cent.