RBI has prioritised inflation firefight

Written by Stuart A Davis | Updated: Jul 29 2010, 03:27am hrs
RBI has hiked the repo by 25 basis points, the reverse repo by 50 basis points and kept the cash reserve ratio unchanged. While the market had widely expected the CRR to remain unchanged, they had expected only a 25-bps hike in both the policy rates. This move is in line with RBIs intention to anchor inflationary expectations and prepare itself to respond to any further build-up of inflationary pressures.

RBI has clearly given priority to containing inflation expectations in the policy announcement. One of the major concerns of RBI is the fact that inflationary pressures have become increasingly generalised and there has been a gradual increase in inflation in non-food manufactured products. Several sectors are showing capacity constraints with pricing power returning to producers. The central bank, therefore, clearly aims at depressing demand side inflationary pressures.

With private investment demand recovering sharply and exports picking up despite the euro zone crisis, domestic recovery has continued in the first quarter. The pace of growth in industrial output is still robust. RBI, recognising this, has revised its 2010-11 GDP growth forecast to 8.5% from 8%. The monsoon too has shown encouraging signs of progress thus far, and the agricultural output is expected to be better than last year, RBI has stated.

RBI has indicated that policy rates are still not commensurate with the strong economic growth. In order to provide for a stable inflation outlook, policy rates need to be maintained at optimum levels and signify the true state of the economy. The central bank has further impressed on continuing with the approach of gradual normalisation of the policy rates consistent with the growth.

In addition, RBI has mentioned that Indias evolving macroeconomic situation warrants flexibility to maneuver at shorter intervals of time and has formalised the mid-quarter reviews, to be held at an interval of about one and a half months after each quarterly review.

The writer is CEO, HSBC India