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Won’t accept high inflation as new normal: RBI

Won’t accept high inflation as new normal: RBI
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First Published: Thu, Aug 25 2011. 11 49 PM IST
Updated: Thu, Aug 25 2011. 11 49 PM IST
Mumbai: The Reserve Bank of India (RBI) has vowed to continue its fight against price rise that has begun to hurt the savings of the common man in Asia’s third largest economy.
The central bank, in its annual report released on Thursday, said it is not willing to accept the current high inflation as the “new normal” even at the cost of sacrificing growth. RBI follows a July-June financial year.
The growth is likely to decelerate in the current year to remain close to the projected 8% this fiscal, but RBI warned that there could be a “downward bias” if the global uncertainties worsen.
“In the face of nominal rigidities and price stickiness, there are dangers of accepting elevated inflation level as the new normal,” RBI said. “On a year-on-year basis, inflation may remain stubborn in the near term and start falling sometimes in the third quarter of 2011-12.”
Experts see in the RBI commentary an indication of further tightening of policy stance in the months ahead until it sees visible signs of inflation easing. This in turn will make money costlier for individuals and corporations.
The central bank is slated to announce its mid-quarter monetary policy review on 16 September.
RBI reiterated in its annual report its argument that lack of support from the government limits its ability to fight inflation, and warned that that government was likely to overshoot the budgeted fiscal deficit target of 4.6% for the current fiscal year. “If the economy slows down beyond what is currently anticipated, the resultant revenue erosion could magnify the slippage.
“The high persistent inflation over the last two years has brought to the fore the limitation in arresting inflation in absence of adequate supply response,” RBI said, adding: “...monetary policy still has an important role to play in curbing the second-round effects of supply-led inflation.”
RBI deputy governor Subir Gokarn said the central bank expects moderation in inflation by the latter half of the year. “As inflation starts going down and remains within a negative trajectory, which is what we are anticipating post November-December, that changes the overall perspective on the growth-inflation balance.”
Detailing the reasons for a near double-digit inflation, the central bank said an incomplete pass-through of high global commodity prices, persistence of high inflation expectations and continuing food price pressures may, together, keep inflation at “elevated in near term”.
Global uncertainties, especially in Europe, and slowdown fears in the US worsened early August when rating agency Standard and Poor’s downgraded the long-term sovereign credit rating of the US, sending shock waves across markets worldwide.
Economists do not see any easing in the anti-inflationary stance of RBI in the coming months. “RBI is just being consistent with whatever actions it has taken in the past,” A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd, said. “The message is clear. RBI will not back down from its policy stance until the inflationary pressures subside.”
Since March 2010, RBI has raised its key policy rate 11 times to contain inflation.
Inflation, as measured by wholesale prices, eased a bit to 9.22% in July compared with 9.44% in June as the rate of price rise in food articles and petro-products eased, though pressure remained on manufactured items. This, however, is far above RBI’s projection of 7% by March 2012.
The latest hike in RBI’s key policy rate came in July, when it hiked the repo rate, or the rate at which it lends overnight funds to banks, by half a percentage point to 8% despite a majority of the members of its technical advisory committee favouring for a status quo.
Policymakers do not foresee inflation subsiding in the immediate future. On 16 August, Kaushik Basu, the government’s chief economic adviser, said the inflation rate may “peak” in August and will be about 10%. “Till December, inflation will stay around the same levels,” Basu said.
Another increase in the policy rate will force banks to make money dearer to borrowers, but banks may not increase the deposit rates, said Abhishek Kothari, a research analyst with Way2Wealth Brokers Pvt. Ltd.
“In the last one year, deposit rates, for most banks, have gone up by 4 percentage points, while the lending rates have increased only by 2-2.5 percentage points. This difference leaves banks with no option but to increase their lending rates from now on to protect their margins,” Kothari said.
The movement of global commodity prices will be a decisive factor for inflation in India, RBI said. “Should the global recovery weaken ahead, commodity prices may decline further, which should have a salutary impact on domestic inflation.”
RBI has discounted any impact of the high asset prices on inflation, saying Indian home buyers, unlike in advanced countries, do not borrow against the houses already purchased when their valuations go up.
“Thus, asset prices do not seem to influence the inflation path and conduct of monetary policy may refrain from responding directly to asset price cycles.”
dinesh.n@livemint.com
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First Published: Thu, Aug 25 2011. 11 49 PM IST
More Topics: RBI | Inflation | Subir Gokarn | Duvvuri Subbarao | US |