On December 3, the Prime Minister’s Chief Economic Advisor, Chakravarthy Rangarajan indicated the possibility of an interest rate intervention by the RBI in the near future. Rangarajan stated that the rising food inflation is likely to flow into the manufacturing sector and an interest hike is being contemplated.
The food inflation, on the account of weak monsoon, climbed to an 11-year high of 19.05%, for the week ended November 28, 2009. The Government stimulus for economic recovery, which stands at 12% of GDP, including bank rate cut, reduced reverse repurchase rate, reduced cash reserve ratio (CRR), and so on, has been the key growth driver in the recent quarters.
As the food inflation is touching new highs, it has become imperative for the Government to go soft on the incentives and review the current monetary policy. Experts believe that the rates can be subject to an upward revision by almost 300 basis points, in 2010. The policy measure will be decided after taking the Rabi (spring crop) harvest, which is expected to be good in the coming year. Although the news has not come as a surprise, the investors are wary of the degree of revision. According to a survey, almost 40% of the investors are looking for portfolio revision to deal with the situation.
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