RBI needs to take monetary action

RBI needs to take monetary action

New Delhi: The Reserve Bank of India (RBI) will have to further tighten monetary policy on 20 April if prices continue to rise, as expected, from 9.89% headline inflation in February, the chief statistician said on Wednesday.

“If RBI is signaling a concern about inflation, and if inflation continues to accelerate, they will certainly do something," Pronab Sen told Reuters in an interview on Wednesday.

The RBI will review its monetary policy on 20 April.

Sen, however, declined to specify what policy actions were required, saying it was for the central bank to decide.

India’s four-month spell of wholesale price inflation above the RBI’s perceived comfort zone of 5% prompted the central bank in March to unexpectedly hike its key lending rates by 25 basis points.

The RBI last month warned of inflationary pressures from higher capacity utilisation and rising commodity and energy costs.

Sen said WPI inflation in March was likely to be higher than February’s 9.89%, partly due to a low base effect. Headline inflation could start easing from April when the base effect starts wearing off, he added, noting that food price inflation has already started moderating.

A Reuters poll shows analysts expect lending rates to go up by another 100 basis points between now and the end of December.

The food price index rose an annual 16.35% in the 12 months to 20 March, above the previous week’s reading of 16.22%. Fuel inflation rose 12.75% in the same period from the previous week’s 12.68% rise.

High food prices have put on hold government plans to cut its food subsidy bill and trim the fiscal deficit by raising prices of subsidised food grains for welfare schemes, an unpopular step when inflation remains high.

Sen said non-agricultural inflation was still accelerating.

Consumer Prices

Sen also said consumer price inflation was expected to come down below 10% by May. The less widely watched consumer price index rose 14.86% in February from a year earlier, data showed, lower than January’s annual rise of 16.22%.

The chief statistician said industrial output growth was expected to remain between 15-16% in February and March compared to 16.7% growth in January.

India’s economy, the world’s second fastest growing after China, probably expanded by 7.2% in 2009-10, and is set to grow 8.5% in the year that began Thursday and 9% in 2011-12, according to government forecasts.

Sen said the 7.2% estimate for gross domestic product for the financial year 2009-10 would be revised in May, but said it was too early to say whether it could be revised upward.

The central bank has estimated that the Indian economy was likely to grow by 7.5% in 2009-10.