Apex bank hints at hike in rates to tame inflation

Inflation remains above the comfort level and anchoring inflationary expectations is a difficult challenge for monetary policy, the Reserve Bank of India (RBI) said on Monday, a day before its monetary policy review. Its assessment is seen by some as a hint that the central bank may raise key policy rates, as expected by many bankers.

RBI has raised the repo rate five times this year to subdue inflation. Bankers expect RBI to raise repo and reverse repo rates by a quarter percentage point each tomorrow. While inflation in non-food manufactured products has moderated, food inflation remains disconcertingly high, despite normal monsoons, RBI said in its Macroeconomic & Monetary Developments report released on Monday.

The central bank described India’s economic growth outlook as robust. The 13th round of its survey of professional forecasters in September raised India’s median GDP growth estimate to 8.5 per cent from the earlier 8.4 per cent, bolstered mainly by growth forecasts for agriculture and services.

The good monsoon will boost agriculture in the second and third quarters. Improved corporate sales and excise duty collections, as well as rising capital expenditure and increased demand for funds from the private sector all signalled prospects for higher growth.

The survey, however, cautioned that persistent inflation and moderation in capacity utilisation posed downside risks to growth. Factors that could hurt exports include an appreciation of the rupee triggered by rising capital inflows and weak growth prospects of advanced economies.

Besides domestic factors, there are also international factors exerting pressure on prices in emerging market economies such as India, RBI said. The pressure on capacity, relative to buoyant domestic demand, as well as rising global commodity and food prices, add to the risk of inflation, the central bank said.

“Going forward, the growth-inflation outlook will dominate the policy response, and the nature and timing of monetary policy actions would have to be conditioned by their expected effectiveness in attaining the intended goals,’’ RBI said.

RBI also cautioned that India’s current account deficit may exceed the previous fiscal’s 2.9 per cent.