Taming inflation a predominant objective: RBI ahead of policy

The RBI would announce its third quarter monetary policy tomorrow amid speculation that it may increase short-term lending (repo) and borrowing (reverse repo) rates ranging between 25-50 basis points.

Even as the economy grew by 8.9 per cent in the first half of the current fiscal, inflation, which increased to 8.43 per cent in December, has remained an area of concern.

"While downside risks to growth have receded, upside risks to inflation have increased," the RBI said adding containing inflation will have to be the predominant objective of monetary policy in the near term.

RBI, in its macroeconomic and monetary development report ahead of quarterly review of monetary policy, also warned that persistent high inflation could endanger the growth objective and also increases risks to inclusive growth.

RBI, since March 2010, has increased the policy rates six times to anchor inflationary expectation and check rate of price rise.

"Conventional wisdom says that there should be at least 25 basis point hike in interest rate," State Bank of India Chairman O P Bhatt had said last week.

Despite moderating for two weeks, food inflation is still very high at 15.52 per cent on account of rising prices of essential items like vegetables, particularly onion and tomato, fruits, milk and eggs.

A day before he met RBI Governor D Subbarao on January 20, Finance Minister Pranab Mukherjee had expressed concern over food inflation saying, "some of the vegetable prices are still high."

Though analysts are not sure whether any further tightening of interest rate can check the price rise, the central bank seems to have few options but hike rates.

Endorsing the widespread view, HDFC Chairman Deepak Parekh had said RBI is expected to raise key short-term rates by 25-50 basis points. "The RBI may be looking at an increase (of short-term rates) at 25-50 basis points... But I personally feel that interest rates are already high and it will impact the growth of retail loans and housing."

Industry chambers, including FICCI and CII, had expressed apprehensions that RBI tightening the monetary policy could hit the growth, especially considering that industrial growth plunged to an 18-month low of 2.7 per cent in November, 2010.