Inflation still RBI's key fear

A cocktail of four factors that could hike inflation stayed the Reserve Bank’s hand in raising interest rates, which is good news, but won’t result in lowering home loan EMIs. The central bank, however, did nudge banks to pass on earlier rate cuts during its fifth bi-monthly monetary policy review for this fiscal on Wednesday. Key policy rates like the repo rate (that at which the RBI lends to banks when they are short of funds) was left unchanged at six per cent. The RBI felt there was enough liquidity in the system and credit growth was picking up.

The positive stance on growth (7-7.8 per cent in Q4) is welcome and in line with reforms, like ease of doing business, undertaken by the government. While some feel the central bank is unduly obsessed with inflation, its reason for holding rates do merit attention. Food prices are inching up due to unseasonal rains that hit the rabi crop and the fact that traders are passing on high prices to retailers.

The government should try to check this kind of unnecessary profiteering. The fears that the government will miss its fiscal deficit target due to farm loan waivers will be known once this exercise is over in the states. Hopefully, states will raise revenues to fund these waivers. It’s a tricky situation as the reduction in several items under GST is likely to hit government revenues. More important is to ensure that there is no misuse of these loan waivers by unscrupulous elements. Fuel prices too have risen globally. Perhaps there is room for a cut in taxes on petroleum products.