RBI hints that rate hike is on

Move aimed at mitigating liquidity

RBI hints that  rate hike is on

 While mitigating the liquidity pressure, RBI persevered with calibrated monetary tightening keeping in view the higher level of inflation. Between April and July 2010, the repo and reverse repo rates were raised cumulatively by 50 basis points and the CRR was raised by 25 basis points, it said adding, this in turn is reflecting increased demand for credit associated with recovery in growth, non-food credit growth to the private sector remained buoyant.

With concerns over the recovery receding, increasing risks of generalized inflation indicate that monetary policy has to continue the calibrated normalization process, it said.

Inflation dynamics

At the same time, the normalisation of monetary policy of the Reserve Bank in 2010-11 so far has been conditioned by the changing growth-inflation dynamics characterized by robust acceleration in growth and increasing generalization of inflation, it pointed out. 

Headline WPI inflation has been in double digits since February 2010 – also become increasingly generalized in every successive month – while Non-food manufacturing inflation accelerated from near zero in November 2009 to 7.3 per cent in June 2010.  Given the risks to inclusive growth from high inflation, the monetary unwinding that started in October 2009 should continue till inflation expectations are firmly anchored and inflation is brought down.

Progress of monsoon

Going by the progress of the monsoon so far, agricultural output is expected to be better than last year, the document said.  Industrial production continues to exhibit double digit growth in the current year, notwithstanding some moderation in May 2010, the downside risks to growth are low, while lead indicators for services activities suggest continuation of the growth momentum. 

Thus, it continued, GDP growth in 2010-11 can be expected to be higher than the 8 per cent projected in the April 2010 Monetary Policy Statement.  The Professional Forecasters’ Survey conducted by RBI in June 2010 places overall (median) GDP growth rate for 2010-11 at 8.4 per cent, higher than 8.2 per cent reported in the previous round of the survey.  Private investment demand recovered sharply in the last quarter of 2009-10, while production trends in capital goods point to continuation of the strong investment activities in the near term.

  However, growth in government consumption demand is likely to moderate, reflecting the fiscal consolidation programmed in the Budget.  Overall, private consumption and investment demand will be the two major drivers of growth during this fiscal. The document said the banking sector switched over to a new “base rate” system of lending effectively July 1, 2010, which is expected to enhance transparency in loan pricing, promote competition in the credit market and also improve the transmission of monetary policy.  The base rates set by major public sector banks were in the narrow range of 7.28 to 8 per cent. 

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