RBI likely to hike key rates


Staff member
Mumbai May 3:

Indicating that a rate hike is imminent, the Reserve Bank of India (RBI) said that persistence of inflation warranted continuation of anti-inflationary monetary policy stance for sustaining growth over the medium-term.

“Inflation path remains sticky and risks are on the upside. Headline inflation could remain elevated in the first half of 2011-12 before declining gradually in the second half, but could remain above the RBI's comfort level,” the RBI said on the eve of its Annual Policy 2011-12. “Pass-through of global commodity prices, especially oil, has been as yet incomplete and constitute a significant medium-term risk,” it added.

Admitting that growth would be hampered with high inflationary pressure, the RBI stated, “policy trade-offs may arise as downside risks to growth and upside risks to inflation have increased.” High global crude oil and other commodity prices pose a risk to growth and inflation. Experience suggests that high growth phases have coexisted with low inflation. Growth in 2011-12 is expected to stay close to the trend. Growth risks emanate from high oil prices and some moderation in investment. Business expectations surveys exhibit moderation. Survey of professional forecasters also predicts weaker growth and firmer inflation.

Headline inflation exhibited strong persistence in 2010-11 due to supply-side shocks and gradual generalisation of price pressures. Inflation drivers have changed over three distinct phases. Headline inflation during 2010-11 was impacted primarily by food inflation during April-July, by primary non-food articles during August-November and in a more generalised manner by non-food manufacturing articles since December 2010. The RBI said that stronger monetary transmission impacted interest rates. Monetary transmission strengthened in the fourth quarter of 2010-11 with interest rates firming up gradually across the spectrum as liquidity remained in the deficit mode. Banks progressively passed on the increased costs in the form of higher lending rates.

Deposit rates also rose rapidly to accommodate rise in credit amidst tight liquidity. Money market rates firmed up reflecting tight liquidity conditions. Equity markets witnessed an orderly correction during the quarter. The rupee remained stable and orderly without any interventions. “GDP growth during 2010-11 reverted to its recent trend, aided by a rebound in agricultural growth, ” the RBI said. However, industrial growth decelerated in the second half on account of high base effect and moderation in investment demand. Manufacturing activity was spread more evenly. Services sector exhibited sustained momentum in 2010-11.