A day before it is widely expected to hike interest rates, the Reserve Bank said it would continue exiting from its easy money regime to check double-digit inflation, while ensuring stable economic growth. The same day, Chief Statistician T.C.A. Anant said India's headline inflation in July could be around 11 per cent.
The Reserve Bank is set to unveil its quarterly review of the annual monetary policy on Tuesday. It is widely expected to hike its short-term lending (repo) and borrowing (reverse repo) rates by at least 0.25 per cent each.
In its first quarter of 2010-11 report on macroeconomic and monetary developments, the RBI said: "Given the risk to inclusive growth from high inflation, the monetary unwinding that started in October, 2009 should continue till inflation expectations are firmly anchored and inflation is brought down."
"With receding concerns relating to the recovery and given the emerging risks of generalised inflation, monetary policy measures have to continue the calibrated normalisation process," the Reserve Bank of India (RBI) said in the report.
Meanwhile, the chief Statistician also said higher farm production and monetary tightening are needed to tame headline inflation and that he expected prices to cool by November.
"All the measures that the RBI (Reserve Bank of India) has been taking in this regard and may take in the future also, should also have shown by then (third quarter). All this means that you would have softening of prices."
Bracing For The Fourth Hike
The RBI has increased interest rates three times since March by 25 basis points each time and is expected to do so again at its quarterly review on Tuesday.
According to economists, the headline inflation is no longer confined to food items but has spread to manufactured products.
Citing a continuing growth momentum based on a better monsoon and robust industrial production, RBI upped its 2010-11 GDP growth projection to 8.4 per cent against 8.2 per cent reported in the previous survey. However, the apex bank cautioned that uncertain external environment is a major risk to growth in the near-term.
India's annual headline inflation has remained in double-digit for the fifth straight month in June, all-but cementing expectations the RBI will raise interest rates for the second time this month to contain surging prices.
The food price index rose 12.47 per cent in the year to July 10, against its 12.81 percent reading in the previous week.
Small Steps
The Prime Minister's Economic Advisory Council headed by former central bank governor C. Rangarajan had said last week that the RBI needs to take strong monetary action to tame high inflation.
Rangarajan said that he expected the central bank to carry out a series of small policy tightening steps.
Prime Minister Manmohan Singh, who is facing strong criticism over handling of the inflation issue, said on Saturday that headline inflation could come down to 6 per cent by December.
The opposition parties have said they would seek a special discussion and vote in parliament over high prices this week.
But there is little threat to government stability, and the move will only distract from pushing key reform bills in the current session of parliament that began on Monday.
Key policymakers have been saying that food prices will moderate by the end of this year, betting on good monsoons and strong harvest to cool the prices from the high levels touched towards the end of last year, when the worst drought in 37 years hit farm output.
The banking system faced an unprecedented tight cash conditions since early June on account of nearly Rs 1.36 lakh crore flowing out of the system due to payments for 3G and broadband wireless auctions and advance tax outgo.
Noting that credit growth in banking system has been picking up, led by state-owned banks, RBI said that there is a need for banks to step up deposit mobilization to meet credit demand.
Further, the apex bank said that a sustained and a rapid rise in housing prices over successive quarters was an area of concern from the standpoint of their possible spill over to demand pressures, general price level as well as financial stability.
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