RBI expects no respite from rising inflation

RBI expects no respite from rising inflation
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First Published: Fri, Aug 29 2008. 11 41 PM IST

Reserve Bank of India governor Y.V. Reddy. (Namas Bhojani / Bloomberg)
Reserve Bank of India governor Y.V. Reddy. (Namas Bhojani / Bloomberg)
Updated: Fri, Sep 05 2008. 06 54 PM IST
Mumbai: The Reserve Bank of India, or RBI, is unlikely to ease its monetary policy anytime soon because it does not see signs of either a slowdown in consumer demand or a drop in the inflation rate, which has surged to a 16-year high on the back of rising food and fuel prices.
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“As the inflation rates have hardened beyond tolerable levels, monetary policy would continue to address aggregate demand pressures which appear to be strongly in evidence,” RBI said in its annual report for 2007-08 released on Friday. The central bank follows a July-June financial year.
Inflation risks, according to the report, have “increased sharply” and “appear to be persistent”.
RBI has raised its policy rate by 125 basis points and banks’ cash reserve ratio, or CRR, the proportion of deposits that commercial banks need to keep with the central bank, by 150 basis points since the beginning of fiscal 2009 to rein in rising inflation and credit growth.
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One basis point is one-hundredth of a percentage point.
But the impact of its monetary measures is yet to be felt. Despite successive rate hikes, bank credit during the current financial year has grown by 25.9% against the RBI’s target of 20%. The inflation rate, measured by wholesale prices, which rose to 12.63% in early August, has declined to 12.40%, but RBI does not see it coming down sharply soon.
Some bankers and bond dealers expect RBI to raise its policy rate further or suck out more money from the banking system by raising CRR in October, when it releases its mid-term review of monetary policy. The annual report listed many “upside risks” to inflation, with the outlook on crude oil prices continuing “to be uncertain”. Global commodity prices may remain high even though their “moderation” cannot be ruled out.
Supply-side pressure on inflation will continue on account of both “pass-through from international prices” and domestic “demand-supply imbalances” in certain key commodities.
Under these circumstances, RBI has reiterated its “determination” to act “decisively, effectively and swiftly”.
RBI’s aggressive monetary tightening has demonstrated its resolve to combat inflation. It has pared its growth forecast for the economy for fiscal 2009 from 8.5% to 8%.
The annual report, however, said the medium- to long-term prospects for the Indian economy continue to be robust.
Reserve Bank of India governor Y.V. Reddy. (Namas Bhojani / Bloomberg)
It hinted at “domestic risks” such as uncertainty about the progress of the monsoon that is key to agricultural output.
Rupa Rege, chief economist at Bank of Baroda, said the inflation rate could rise to 14.5% between November and December, adding the rupee’s depreciation, which would make imports more expensive, will also stoke inflation.
“Inflation rate will remain in double digits till February 2009. If the oil prices remain relatively benign, we could see RBI move from tightening to neutral policy stance,” said Subir Gokarn, chief economist for the Asia-Pacific at rating agency Standard and Poor’s.
RBI does not seem to be in the mood to take any chances. “An overriding priority for monetary policy would be to eschew any further intensification of inflationary pressures,” said the annual report.
Another worry for RBI is the fiscal situation. The central bank sees growing stress on the government’s finances because of rising expenditure on account of subsidies, a more than Rs70,000 crore loan waiver offered to farmers and an increase in the salary of government employees.
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First Published: Fri, Aug 29 2008. 11 41 PM IST
More Topics: Video story | Inflation | RBI | CRR | Economic growth |