The Reserve Bank of India’s decision to raise the repo rate to 5.5 per cent marks more than a routine adjustment in the price of money. It signals a change in the economic environment confronting India: growth remains robust, but the conditions sustaining that growth are becoming less forgiving. The contradiction is striking. The economy is projected to grow by 7.1 per cent, yet the RBI has chosen to tighten monetary conditions. That is not necessarily a sign of weakness.

It reflects the uncomfortable reality that strong growth does not insulate an economy from imported inflation, currency depreciation or external shocks. Oil is the immediate danger. India imports the overwhelming majority of its crude requirements. When international crude moves above $100 a barrel, the consequences travel through transport, electricity, manufacturing and household expenditure. A weaker rupee compounds the problem because every dollar of imported energy costs more in domestic currency. The RBI cannot produce oil or strengthen the rupee through monetary policy, but it can prevent temporary price pressures from becoming embedded in inflationary expectations.

That explains why Governor Sanjay Malhotra has signalled that........

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