RBI hints at fresh rate hike
Pegs country’s GDP growth rate at 8.2 pc
The Reserve Bank of India (RBI), on Monday, said that the monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations despite remaining supportive of growth impulses.
Economists interpret that the banking regulator seeks to further tighten the policy to containing high inflation and for which it may resort to measures like interest rate cut – both repo and reverse repo – by at least 25 basis points and also hike in CRR. To that extent, RBI in a document released this evening on ‘Macroeconomic and Monetary developments in 2009-10’ said, “While recovery in private demand needs to be stronger to reinforce the growth momentum, the already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth.”
High inflation
Though inflation is expected to moderate in the next few months from the peak levels seen recently, upside risks remain, the RBI said in its report on macroeconomic and monetary developments in fiscal year 2009/10 (April-March), which serves as backgrounder to the Monetary Policy Statement 2010-11 to be announced by RBI on Tuesday. Accordingly, RBI expects economic growth to be higher in 2010-11 than in 2009-10. “Asset prices increased at a relatively faster pace in the recent months, reflecting optimism about the economy’s propects as well as easy liquidity condition.”
Even as headline WPI inflation firmed up significantly during the fourth quarter of 2009-10, RBI said the initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of a deficient monsoon on agricultural output and the increase in international crude prices.
In the second half of the year, RBI continued, with persistent supply side pressures, inflation became increasingly generalised. These inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations, it said.
Finally, the domestic saving rate has exhibited some decline, led by significant decline in public sector savings, which has adverse implications for the potential growth of the economy, RBI said. Meanwhile, Reserve Bank’s Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent.
