To mitigate the effects of the situation on  inflation, BoM has cut the Key Repo Rate by 50 basis points, bringing it to 8 %. Though this is the third decrease brought during the last three months, the Central Bank does not consider any further cuts until a sustained decline in Headline and Core 2 inflation is noted. In fact, juggling between controlling the inflation rate and the reverse effect of a strong rupee on the  local export sector is presently a dilemma faced by the BoM.

BoM's Governor Rundheersing Bheenick  made it clear at the beginning of the week that fighting inflation is not the utmost priority of BoM but “to ensure a balanced and orderly economic development of the country. We have to consider the different sectors of our economy, their evolution and how they are affected by global trends.”

The depreciation of the Euro and the US dollar has had some adverse repercussions on the domestic real sector, in particular the manufacturing sector especially export oriented enterprises. “The slowing of the manufacturing sector activity could increase job-loss risks,” he said.

Bheenick also added that “the interest rate is not the sole instrument that should be used to tackle downside risks to growth. All other stakeholders of the economy, including policymakers, manufacturers, importers, distributors and customers have to participate in order to fight inflation.”

Commenting the inflation issue the Governor noted that there has been an easing of headline inflation over the last two months while the Core 2 inflation rate has been stable over the last four months and is also showing some signs of easing since last MPC meeting.

“Our precarious situation leaves us in a delicate situation where enterprises should exercise caution in granting wage increases in order to avoid adverse wage-price spiral effects that could endanger the competitiveness of the country,” Bheenick said.