Comment: Samiran Chakraborty

'RBI shows it is not averse to bold moves'

A rate increase of 50 basis points and a hawkish rhetoric, a combination urgently required to address the problem of inflation, has been delivered by the Reserve Bank of India (RBI) in a bold move. There are several reasons why this policy is quite different from any other policy in this rate rise cycle.

First, there is a clear acknowledgment that inflation takes precedence over growth at this point of time and sacrificing some growth is an unavoidable cost of bringing down inflation. In this context, RBI’s 2011-12 growth projection of 8 per cent is more credible than the government’s forecast of around 9 per cent. Second, a calibrated approach was earlier preferred, but now RBI has demonstrated it would not be averse to following a bolder approach if the situation warrants.

RBI’s forecast of inflation staying close to 9 per cent till September-end accurately reflects the inflationary pressures ahead of us. So, it is quite likely that more interest rate increases would be administered in the near term. However, there is some uncertainty over how quickly the transmission of monetary policy is going to work through the system and whether RBI can pause to assess the lagged impact of its rate actions on future growth and inflation, even when actual inflation is close to 9 per cent.

If we look at the rise of 50 basis points in conjunction with an increase in provision norms and savings deposit rate, the anti-inflationary bias is even more evident. We welcome this first pre-emptive step of engineering a soft landing, rather than risking a hard landing later on.

Samiran Chakraborty, Head of research, India, Standard Chartered