“It is better to take some action now and continue with the exit strategy,” Duvvuri Subbarao said referring to debate over whether RBI should opt for small, gradual policy moves to quell inflation or act more aggressively.
In the medium term, high inflation would threaten sustained economic growth, he noted.
Referring to emerging pressures in the economy, he said factory capacity utilisation in India had risen to 72 per cent, slightly off the record level of 76 per cent scaled in 2007/08.
“Contribution of food to inflation was at 100 per cent in November. By February, contribution of food to inflation has come down to 52 per cent. So, these numbers say even if food inflation is high, non-food inflation is building up.”
Real estate prices were reaching pre-financial crisis levels, reflecting a further increase in demand-side pressures, he added. Economists polled by Reuters after Friday’s rate hike say the Reserve Bank is likely to raise policy rates to a slightly higher level this year than earlier expected. Most now see rates being raised by a total of 100 basis points by the end of 2010.
India’s wholesale price index rose a faster-than-expected 9.89 per cent in February from a year earlier, driven by firm food prices. But many officials hope inflation will ease somewhat in coming months as winter-sown crops come onto the market.
