Pressure builds up on RBI to go soft on rates

July 22: Pressure is building up on the Reserve Bank of India to touch the policy rates as lightly as possible so that growth is not affected. Even as food inflation increased according to Friday’s figures, the rate of increase has decelerated.

The finance secretary, Mr Ashok Chawla, told a business news channel that the RBI should not aggressively tighten monetary policy and risk denting economic growth. He said “If there is oversupply of money, it has necessarily to be handled by monetary policy instruments. But if there are other factors which are contributing to rise in prices or inflation, then it may not be a very useful tool.”

He said that if the RBI was aggressive in controlling inflation it would hamper and spoil growth without actually helping on the inflation front.

The secular view is that the food inflation has now spread to the broader sectors like manufacturing. However Edelweiss Capital economist, Mr Siddhartha Sanyal, said that they had tried to move away from the traditional decomposition, and re-aligned the drivers of inflation into three baskets: (a) Agro-inflation, (b) imported industrial inflation and (c) non-food domestic demand driven inflation.

The report says Agro-prices and global factors, on the contrary, contribute 800 basis points “Our re-arranged WPI basket suggests that out of the current inflation of 10.2 per cent less than 250 basis points is contributed by the demand-pull factors. We believe that both these key factors would not be supportive of inflation.” Like analysts they feel that the renewed global uncertainty, which even the Fed Reserve chief, Mr Ben Bernanke, spoke about would act as a drag on global commodity prices. Good monsoon should help moderate food and agro-inflation.

Edelweiss economists feel the fear of inflation going out of control is unfounded and they see it being tempered in the next three months. This view, if correct throws the ball in the government’s court as monetary policy changes would not be significant. The government would get have to get its act on the food distribution front to take advantage of a good monsoon.

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