Dropping ample hints that it will press ahead with interest rate hikes, the Reserve Bank of India on Monday said the ‘unfinished task' of taming inflation warrants continuation of its anti-inflationary monetary stance.
The broad thrust on tight monetary policy will continue until there is credible evidence of inflation trending close to a level within its comfort zone, the RBI indicated in its Report on Macroeconomic and Monetary Developments: First Quarter review (2011-12), released on the eve of its first quarter review of monetary policy .
Notwithstanding the slowdown in growth, the central bank underscored the fact that the persistently high inflation and its expected slow decline warrant continuation of its anti-inflationary policy stance.
The RBI warned that inflationary pressures are likely to stay, if not intensify, in the July-September 2011 period, before moderating.
Fuel prices
“While some revision in fuel prices hike was factored in the projected path of inflation, the pass through is yet incomplete, keeping up the near term pressure,” the RBI said.
Inflation has stayed high for a year-and-a-half now, averaging 9.5 per cent in this period, the report said.
Many bankers and economists are expecting the RBI to hike the repo rate (the rate at which it lends to banks) by 25 basis points (0.01 per cent equals 1 basis point) in the first quarter review today, to rein-in inflationary pressures.
Following up on a series of rate hikes through 2010-11, policy rates were raised by 75 basis points in the April-June 2011 period, with a 50-basis point hike in May and a 25-basis point increase in June.
Altogether, in a span of 15 months starting March 2010, operational policy rates were raised by 425 basis points – one of the sharpest monetary tightening exercises undertaken anywhere in the world.
While monetary policy has been considerably tightened, the policy exigency at this juncture warrants continuation of its anti-inflationary stance to tame inflation and anchor inflationary expectations, the RBI said.
Near-normal monsoon may not ease pressure on food inflation due to increases in wage costs and support prices.
In this regard, the RBI said, breaking inertial dynamics of wage and food price raise is important for arresting inflation.