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The Reserve Bank of India seems undecided on its own position in the old debate between inflation and growth. In its mid-quarter review in December, the RBI did not hike the repo rate. Its argument then was that the inflation seemed to be easing even though it continued to be a cause for worry. The belief that inflation would soften was not belied and this gave rise to the widespread expectations that the RBI would maintain a status quo as far as repo rates were concerned. Thus there was surprise and dismay when on Tuesday the RBI, in its third quarter review, raised the repo rate by 25 basis points to eight per cent. The reasons given for this rise are not entirely unpredictable. Inflation continues to be high though it is lower than what it was in December. This fails to explain why the rates were not raised in December. Core consumer price index inflation (that is excluding food and energy) was high in December and remains high. Thus, again the raising of the repo rate now and not in December is baffling. The wholesale price index, especially the manufacturing component and excluding food, has risen presumably because of demand. What is confusing here is that the RBI, according to the Urjit Patel committee’s recommendations, has come down in favour of the consumer price index and treats the wholesale price index as less relevant. Thus the rise in the wholesale price index cannot be used to justify the present hike in the repo rate.

If the RBI has decided to work on the basis of the consumer price index, which is projected to be around eight per cent at the end of 2014-15, then raising the repo rate in December would have been justified; but the repo rate was raised in January with every good reason which were all present in December. This is the nub of the confusion. One argument being offered is that it is very likely that the RBI has seen the last of repo rate hikes if its calculations regarding the direction of consumer price index holds true. This might suggest optimism but for the fact that projections regarding the consumer price index are always risky, and the RBI is aware of this. The expectation that there will be no further hikes may prove to be premature and illusory. The reassuring signals from the RBI are welcome but should be taken with some salt provided that essential commodity is not too expensive.