Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / RBI gets more hawkish
BackBack

RBI gets more hawkish

RBI gets more hawkish

Premium

Perhaps the most significant part of the monetary policy statement released by the Reserve Bank of India (RBI) on Thursday is not the increase in its two policy interest rates by 25 basis points each. That was widely expected. Of more value is its guidance on inflation because it tells us how RBI assesses risks to price stability at this point in time. The Indian central bank now expects wholesale price inflation of 8% in March, a full percentage point higher than the number in the third quarter review in January, when governor D. Subbarao had unambiguously described inflation as his “dominant concern".

Inflation dynamics have changed considerably over the past two years. The initial push came from high food prices. The latest inflation data released by the government this month shows that food inflation is southbound but core inflation is climbing. Household surveys show that high inflation expectations are getting embedded in economic decisions. The rise in global crude oil prices is bound to feed into domestic prices as well. Meanwhile, RBI has said that high prices of proteins could be sticky because of “structural demand-supply imbalances".

Even though the Indian central bank does not have an explicit inflation target that it has to meet, the latest inflation guidance gives us some idea how far behind the curve is currently is. It has increased the repo rate by 200 basis points since March 2010 but inflation has stayed ahead of the cost of money. So real interest rates continue to be negative. The important thing to watch out for is whether inflation will ease in the months ahead (as the finance ministry keeps indicating) or whether more aggressive interest rate hikes will be necessary. Our guess is that policy rates have to go up by at least another 50-75 basis points.

Will that be bad news for growth? The tightness in the domestic money market has ensured that banks have already raised their deposit and lending rates aggressively in last three months, so the actual interest rates for depositors and borrowers could already be close to their medium-term peaks. So companies, homeowners and buyers of consumer goods may not see their interest costs spike dramatically.

Yet, the combination of a tighter fiscal policy and a tighter monetary policy will make it difficult for the Indian economy to grow at 9% in FY12, as expected by the government. Private forecasters are already predicting a mild slowdown in economic activity during the next fiscal.

Should RBI tighten rates further? Tell us at views@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 18 Mar 2011, 12:48 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App