A firm commitment to anti-inflationary stance

The Reserve Bank of India’s (RBI’s) strong policy signal in the form of a 50-basis point rise in repo and reverse repo rates shows the central bank’s firm commitment to fairness and equity, as soaring inflation hurts the poor more. While basic, unavoidable essentials such as food, fuel and housing have spiralled for ordinary families, the stimulus measures after the global crisis have disproportionately benefited the well-heeled, those able to afford costly leisure goods. RBI has been trying to correct this imbalance, by controlling aggregate monetary demand in a consistent fashion.

The RBI analysis of the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario has made it revise upwards its inflation projection for 2011-12 from six per cent to seven per cent and Tuesday’s policy action is consistent with its own perception of future inflation trajectory. Tuesday’s policy move will certainly be effective in moderating inflation and checking inflationary expectations.

While uncertainties will continue in the areas of global commodity prices, global macroeconomic environment and capital flows, etc., the domestic investment sentiment is not expected to be dampened majorly given our country’s structural strengths. Despite a few signs of slowdown in industrial production and interest rate sensitive sectors, the growth in banks’ non-food credit is still above RBI’s indicative target of 19 per cent.

Moreover, while inflation will be the main issue on the RBI radar, it has ensured that it will not allow growth to fall significantly below trend. The resultant stable environment will be more conducive to investment, growth and the banking business.

MD MALLYA
Chairman and Managing Director, Bank of Baroda