RBI predicts high inflation
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Jan. 25: The Reserve Bank of India has in unequivocal terms said that people should be prepared to live in a high inflation regime. The bank has itself revised upwards inflation rate for March 2011 from 5.5 per cent to 7 per cent. The moves announced by the RBI — a quarter per cent increase in two policy rates — were also aimed at bringing down prices.
On the growth front, there seems to be little to worry about, as RBI has projected an increase of 8.5 per cent in the economy for FY11, slightly lower than the growth seen in the first half of the year. One of the positives that came out from Tuesday’s monetary policy is that deposit rates will go up.
The RBI has asked the banks to narrow the gap between credit and deposit growth. For some banks, the difference between what banks charge and what they pay is as high as 4 per cent.
At the post third quarter review of monetary policy press briefing, the governor seemed less optimstic about inflation and economic growth than anytime in the past two years that he has been the RBI governor. In fact for the first time ever in a credit policy the governor said “consumers and investors” will have to deal with “the combined risks from inflation, current account deficit, and fiscal situation,” that is contributing to “an increase in uncertainty about economic stability.” However, the actual action taken by the RBI — the 0.25 per cent increase in repo and reverse repo rates, the rate at which RBI lends to banks and borrows from them, was very mild given its concern.
RBI’s timid response has come in for criticism in some quarters. Mr Ramanathan. K, CIO, ING Investment Managem-ent (I) Pvt. Ltd said: “It is difficult to understand the rational behind the baby steps especially when the revision in inflation target for March end from 5.5 per cent to 7 pr cent is a significant increase. We continue to expect a further 75-100 bps increase during this calendar year.”
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