The one big message that comes through from the report on the Indian economy released by the Reserve Bank of India (RBI) is that the economic recovery is gaining strength, but inflation is fast becoming a major worry.
The central bank will unveil its new monetary policy on Friday and this newspaper has argued for a small increase in interest rates, both to keep a lid on inflation and to spread the process of bringing rates back to normal levels over the next 12 months, rather than jolt the markets with a few sharp rate hikes later this year.
The safe assumption till now was that accelerating inflation was a result of high food prices and monetary policy was not the appropriate tool to deal with the problem. The central bank quite rightly points out that “the stronger recovery could make inflation a more generalized process”.
The professional forecasters whom RBI polls each quarter expect double-digit industrial growth and 8.2% inflation at the end of this fiscal: not a case of overheating for sure, but at least for moving more quickly towards the interest levels India had before the global crisis.