New Delhi: Ahead of RBI’s quarterly credit policy review on Tuesday, global investment bank Lehman Brothers has warned that further tightening of monetary policy to tame inflation could slow down the economic growth of the country.
“With an expansionary fiscal policy and rising risks of second-round effects of inflation, we expect further monetary policy tightening to tame inflation, but only at the cost of slowing GDP growth,” a report by Lehman Brothers said.
After rising since May, inflation slightly declined to 11.89% for the week ended 12 July. Inflation had shot up from 7.82% on 10 May to 11.05% in June on hike in prices of oil products in the first week of June.
The Reserve Bank had earlier raised mandatory deposits of the banks with the Central Bank by 0.25% to 8.25%, as part of its concerted efforts to tame the price rise through check on money supply.
It also raised short-term lending rate to banks by 25 basis points to 8% on 11 June, after inflation crossed the 11% mark.
Echoing analysts views that despite a marginal decline in international crude oil prices and stable commodity prices, Lehman Brothers’ Economist Sonal Verma said the inflationary expectations would remain high. “We expect the twin deficit challenge of rising fiscal and current account deficits,” Verma noted.
“We forecast fiscal deficit and current accounts deficit at 9.1% and 3% of GDP respectively in FY09,” he added.
Expressing concerns over fall in industrial production, which touched 4% mark in May, the global investment bank said: “The top priority of the government would be to tame the high inflation rate, which we expect will continue to remain in double-digits until Q1 2009.”