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RBI sends out a hawkish signal

RBI sends out a hawkish signal
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First Published: Tue, Jul 26 2011. 01 19 AM IST
Updated: Tue, Jul 26 2011. 01 19 AM IST
Inflation concerns still dominate thinking at the Reserve Bank of India (RBI) --- and rightly so.
In its latest economic review released on Monday, a day ahead of its monetary policy statement, when it is expected to raise interest rates once again, the Indian central bank has argued for “continued anti-inflationary bias”. There is a clear undercurrent of hawkishness in such a statement at a time when the central bank is under pressure from business groups and banks to go slow in its battle against high inflation.
While the 10 increases in policy rates since March 2010 have begun to moderate domestic demand, especially in some sectors such as automobiles, where consumer buying is particularly sensitive to interest rates, the RBI makes it quite clear that it does not expect inflation to come under control till at least the second half of the current fiscal year.
In fact, the central bank has warned about what it calls “upside risks to inflation” --- a hint that inflation could move up before peaking. It mentions four factors: high global commodity prices have not yet fully been passed on to Indian consumers, high food prices are being driven by structural changes, recent revisions in minimum support prices and a wage-price spiral. The latter is an outcome that Mint has often warned against, especially in the food economy.
The professional forecasters polled by the RBI have also sent out a sobering signal, by raising their inflation forecast for FY12 by 110 basis points (to 8.6%) and cutting their growth forecast by 30 basis points (to 7.9%); the decline in the expected growth rate for industry and services is quite sharp, with the estimate for agricultural growth being raised thanks to a good monsoon.
Going by all this, the Indian economy seems headed for a rough period over the next three quarters. But the problems could extend beyond that if inflation continues to be sticky.
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First Published: Tue, Jul 26 2011. 01 19 AM IST
More Topics: Ourview | RBI | Rate hike | Monetary policy | CRR |