Views of Mr. Indranil Pan – Chief Economist, YES BANK on the hike in repo rate announced by RBI today

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The logical underpinning of RBI hike today and away from the regular policy date is the rising concern on inflation – especially with regards to food. Food inflation, more than the non-food inflation, can change inflation expectations in India drastically. The governor pointed out that even as domestic supplies are healthy, global high wheat prices are affecting domestic prices while edible oil prices have increased due to the ban in exports from Indonesia. Manufacturers may also pass on higher input costs to end users sooner than later. Thus, the crucial backing for the 40bps hike came from an understanding that inflation is here to stay. The timing of the hike is important too as it seems to just precede a likely 50-75bps increase in the policy rate by the US Fed. This is possibly to ensure that the INR is safe from any speculative attacks, notwithstanding the LIC IPO, and especially as the FX reserves are down by around US30 bn from its peak levels. In this financial year alone, India’s FX reserves are down by about USD 6.9 billion.