Signalling a gradual slowdown of the economy in view of a tighter monetary policy, the Reserve Bank of India (RBI) has revised its projection on the gross domestic product (GDP) for 2008-09 from the range of 8-8.5% to around 8%, during the monetary policy.
The central bank has also increased its inflation target to 7% from a 5.5% earlier.
?While the policy actions would aim to bring down the current intolerable level of inflation to a tolerable level of below 5% ?as soon as possible? and around 3% over the medium-term, at this juncture, a realistic policy attempt would be to bring down inflation from the current level of about 11-12% to a level close to 7% by March 31, 2009,? said RBI in its policy statement.
?Globally, central banks have revised growth targets. In India, as well, there many kinds of growth targets. We have taken a balanced view to project the growth at 8%,?? said YV Reddy, governnor, RBI.
The RBI?s determination to contain inflation is also evident through a downward revision in GDP growth for fiscal 2008-09. It implies that the government, along with RBI, is ready to sacrifice growth slightly to reign in rising prices, said NS Venkatesh, managing director and CEO, IDBI Gilts.
?Taking into account a combined deficit of 9%, we believe that there could soon be pressure in the system to fund growth. This is likely to intensify, if RBI doesn?t open up the ECB window soon. This, coupled with higher rates and the monsoons playing truant, have increased the downside risks to our 7.7% GDP estimate for FY09,?? observed Roini Malkani, econimist, Citi Bank
Similarly, Sonal Verma of Lehman Brothers said the hawkish move delivered a clear message that inflation dominates growth and that a slowdown in demand would be required to curtail inflation, as aggregate demand pressures persist.
?We expect RBI to maintain a tightening bias by hiking CRR by another 25bps in Q3 2008, but expect the repo rates to remain unchanged, as the RBI has front-loaded its monetary policy tightening and due to rising growth concerns,? he said. The wholesale price index on a year-on-year basis increased to 11.89% as on July 12, 2008 from 7.75% as of end-March 2008 and 4.76% a year ago.
The upsurge in inflation reflects a combination of forces at work, like the pass-through of international crude prices to domestic administered prices and also the movements in international key commodity prices, indicating elevated upside pressures for domestic prices of a number of commodities.