RBI is going to tighten its the monetary policy. What could be its impact?

I my view, there are concerns relating to the uncertainty surrounding international crude prices. While crude prices have moderated recently, geo-political risks remain. Central banks are, by and large, persisting with withdrawal of monetary accommodation.

If we review the second quarter of RBIs monetary policy in October, the country shows a fragile economic recovery, which prompted the central bank to continue with the easy stance. However, as the economy has shown a strong growth of 7.9% in the July-September quarter, RBI has got the space to tighten the money supply to contain increase in food inflation, which affected the poor badly.

In my opinion, RBI tightening its monetary policy certainly brings dowm the investments affecting the credit market. I would argue that while there could indeed be some impact on sentiment, ie.,for borrowers to feel gutted if RBI raises rates tomorrow or pushes up the cash reserve ratio. Banks do not change their deposit and lending rates in response to monetary policy rates alone. The balance of the demand for and the supply of funds matters just as much and from that perspective, there is little room for change.

I would like to say that RBI is in a dichtomy. If they adopt some contractionary mesures then that can nuetrelise the stimulus underway. It can also drive up prices. For a long run view our priorities must be expansion of the economy to maintain jobs growth and reducing inequality in the economy.

The soaring food prices are the reason for the monetary tightening and there is worry about the inflation contagion. It can adversely affect the recovery process and coupled with Dubai crisis can give serious results if not dealt with due care. Also it will have an impact on any future plans of the government to raise funds from the market and how far it will be successful in containing the inflation is also a matter of debate, with lot of supply side factors also contributing to the price hike.

But setting aside all those economic aspects, food price hike is turning into a grave issue for the lower income category .Especially in my state, kerala, almost entirely dependent on other states. Government should really do something about it.