The Monetary Policy seems to have made a departure from the “calibrated tightening” stance of the central bank last year. Different economic conditions necessitate different monetary policy actions.
The key premise of the policy seems to be that over the long run, a sustained high rate of inflation is inimical to sustained growth as it harms investment.
Hence, even at the cost of moderating growth in the short run, containing the spectre of elevated inflationary expectation and pressures takes precedence. Further upside risks to inflation due to increases in prices of several industrial raw materials, upward pressure on wages and uncertain crude oil prices remain.
The current hike of 50 basis points factors in the persistence of elevated inflation over the next few months, including the impact of any impending fuel price revisions. It is important to note that despite the 8.5-9 per cent average inflation over the last 24 months, the policy aims to bring down expectations within the 4-4.5 per cent range. The RBI is thus not accepting a new normal for inflation and sticking to a tight target.
Growth guidance
The central bank has acknowledged that its cumulative monetary actions are beginning to have an impact on demand. Its FY-12 projection for GDP growth at 8 per cent factors in the moderation in economic growth. The 8 per cent guidance assumes oil at $110/bbl (as against $125/bbl at present) and a normal monsoon.
Going ahead, we expect the RBI will take further monetary steps to contain inflationary expectations even at the cost of short-term growth. However, with the current round of the 50 bps hike, we believe that RBI has front-ended the rate hike cycle of the current fiscal year.
Another hike likely
We expect liquidity conditions to quicken policy transmission, keeping short-term rates elevated. Another 25-50 basis points hike, post-this policy, doesn't seem unlikely during the remainder of the fiscal year.
However, the role of sustained consolidation in fiscal deficit levels is a crucial parallel parameter that also needs to be achieved to sustain aggregate private demand.
(The author is Chief Executive, Financial Services, Aditya Birla Group.)