New Delhi: Global credit rating agency Moody’s expects the Reserve Bank of India (RBI) to further tighten monetary policy to contain rising prices, even while projecting moderation in economic growth rate to 7.6%.
“If the inflation fails to ease in coming weeks, the Reserve Bank of India will have no choice but to further tighten monetary policy,” Moody’s said in its ‘Macro Roundup; India’s inflation pain persists´.
The report said that the economic growth of the country would moderate to 7.6% in the current fiscal as against 9% achieved in 2007-08.
Pointing out that inflationary pressures remain ‘stubbornly´ strong in India despite aggressive monetary tightening by the central bank in recent months, the rating agency said: “the rise in global commodity and food prices is still a major driver of inflation.”
The RBI, since the beginning of the current financial year, has increased the short term (repo) lending rate by 1.25% and mandatory cash reserve ratio by 1.5%. Both these rates currently stand at 9%.
The recent decline in global oil prices, it said, will not help in cooling inflation in India because prices of petroleum products in the domestic markets are below the international levels.
“The retreat of oil will only help ease the pressure on the government to further raise domestic energy prices,” the rating agency noted.
Secondly, it added, as general elections are due, the government will avoid any policy changes that could provoke social dissatisfaction.
The annual rate of inflation has already touched above 13-year high mark of 12.6% despite fiscal and monetary measures taken by the government and the RBI.
The rating agency expects the inflation rate to peak in the second quarter (July-September), however adding that there is still “a reasonable chance that a single-digit inflation rate will be seen later this year”.
Referring to GDP growth, the agency said due to measures taken to rein in inflation, the country will see slower economic expansion, with the economy set to decelerate in the second half of 2008 amid cooling domestic demand.