With inflation remaining high, RBI to raise rates

With inflation remaining high, RBI to raise rates

This will be the 11th time the central bank will increase key policy rates

With inflation remaining high, RBI to raise rates

Though most bankers feel the RBI will raise rates by 25 basis points (bps), some are worried that it can even be a 50 bps hike. 

The RBI, on Monday, said that high inflation warrants continued tight monetary policy, reinforcing expectations that it will increase interest rates on Tuesday, despite bankers making a plea to RBI last week for a pause in the rate hike. Releasing the Macroeconomic & Monetary Developments First Quarter Review 2011-12 — which serves as a background to the Monetary Policey Statement 2011-12 to be announced on Tuesday, RBI said “Persisting high inflation and its expected slow decline warrant that the Reserve Bank continue with its anti-inflationary policy stance.”

The RBI had raised interest rates 10 times since March 2010, but headline inflation remains above 9 per cent. The RBI’s survey of forecasters lowered its expectations for growth in the fiscal year that began in April to 7.9 per cent from 8.2 per cent previously, while raising its outlook for wholesale price index inflation to an average of 8.6 per cent from 7.5 per cent earlier.

RBI said some moderation in investment and consumption demand is likely, as inflation eats into purchasing power and tighter monetary policy curbs demand.  “The downside risks to growth emerge from uncertainties relating to Southwest monsoon, likely moderation in private consumption and investment demand, high input costs, escalating cost of capital and uncertain global outlook,” it said.

The country’s economy,  grew at a slower-than-expected 7.8 per cent in the quarter that ended in March. For the full fiscal year it grew 8.5 per cent, and the central bank said growth of around 8 per cent was likely for the current fiscal year.  “The emerging growth risks are likely to be factored in the policy reaction,” it said.

The RBI also warned of near-term upside risks to inflation, and said even near-normal summer monsoon rains may not ease food prices because of a rise in government-set minimum food prices. High levels of capacity utilisation, rising wages, and the prospect that electricity prices will increase could add to inflationary pressure, it said adding: “There are upside risks to inflation from still-incomplete pass-through of global commodity prices, downward stickiness of food prices, recent revisions in minimum support prices and evidence of wage price spiral.”

RBI has initiated the most aggressive in tightening policy over the last one-and-half year and stepped up its fight against stubbornly high inflation in May, raising interest rates by a bigger-than-expected 50 basis points.