BackThe policy tightrope
The policy tightrope
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The Reserve Bank of India (RBI) will announce its annual monetary policy on Tuesday. While no one doubts that the central bank will continue to tighten its policy stance, questions remain about the pace of tightening. After slashing its policy rates as well as banks’ cash reserve ratio (CRR) aggressively between October 2008 and April 2009 to fight the effects of the global economic crisis, RBI in October withdrew various stimulus measures for exporters and closed the refinance facilities that it had extended to counter a slowdown in domestic growth. As economic recovery gathered momentum, at the next stage, in January, it increased the CRR by 75 basis points (bps) and, in March, hiked key policy rates by 25 bps each, making it clear that fighting inflation is a bigger priority for the central bank than anchoring economic growth. (One bp is one-hundredth of a percentage point.)
Also See | The Policy Tightrope (Graphic)
With wholesale price-based inflation inching close to 10% in March because of supply-side pressures as well as a pick-up in domestic demand, RBI may need to hike rates steeply to make money costlier and rein in inflation. Still, signs of economic recovery aren’t strong enough, according to some economists, so the central bank will have to walk the tightrope in balancing growth and price stability. A calibrated hike in interest rates is what analysts are betting on despite rising inflation and strong industrial growth. RBI is expected to signal a hawkish stance, but it may not go all out in tightening liquidity.
Graphic by Ahmed Raza Khan/Mint
Compiled by Anup Roy and Ashwin Ramarathinam
anup.r@livemint.com
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