Expecting an economic growth of 8.2% for 2010-11, the Reserve Bank of India (RBI) has said it is important to guard against the risk of high inflationary expectations in the wake of the WPI inflation spiralling to near double digit figures.
Bankers and economists have said RBI?s statement on ?elevated? levels of inflation remain a concern in the immediate term and signals the possibility of an interest-rate increase.
Releasing its Macroeconomic & Monetary Developments for 2009-10 on Monday, just a day before the announcement of its annual monetary and credit policy RBI has said there are upside risks to inflation though it can be expected to moderate over the next few months, from the peak levels seen in recent months.
?It is likely that the growth impulses could further strengthen during 2010-11, and therefore, anchoring inflationary expectations without hurting the growth process continue to be the focus of monetary policy,? the Reserve Bank of India said. Going forward, with the revival of credit demand from the private sector to normal levels, the government borrowing programme for 2010-11, despite planned frontloading, could exert some crowding out pressures, said RBI.
While most economists expect the Reserve Bank of India (RBI) to continue tightening monetary policy at a gradual pace, some expect that it will grow more aggressive given strong price rises.
High inflation may ?hamper? growth, the report said, pointing to the need to withdraw monetary stimulus. The RBI?s assessment clearly indicates that the policy focus has now shifted to inflation management. The double-digit inflation will clearly affect future growth. However, the RBI is confident of a revival and highly concerned about asset price inflation.
?We expect the central bank to hike the repo and reverse repo rate by 50 basis points on Tuesday and also increase the risk weightage on banks? lending to sectors like the commercial real estae,? said Rupa Rege Nitsure, chief economist at Bank of Baroda. The central bank cautioned that the strong rebound in asset prices needs to be monitored closely, given their implications for financial and macroeconomic stability. It also observed that a stronger recovery in India and the favourable interest rate differentials in the face of easy global liquidity conditions could lead to higher capital inflows, which may influence both exchange rate and asset prices.
?There is an improvement in business sentiments and economic activity, but concerns relating to elevated levels of inflation remain in the near term. It is likely that the growth impulses could further strengthen during 2010-11, and therefore, anchoring inflationary expectations without hurting the growth process continue to be the focus of monetary policy,? the RBI said.