Dousing the inflation fire

MONETARY POLICY 2008-09

A few hours later, RBI Governor Yaga Venugopal Reddy announced a monetary policy that will certainly not disappoint the prime minister.

In his last Annual Policy Statement, Reddy has made it clear that his main aim at this point is to control inflation. RBI sees inflation at 5.5 per cent in FY 09 "with a preference to bringing it close to 5 per cent as soon as possible".

The announcement of a second CRR hike in as many weeks is just one part of the broader game plan. The idea is to moderate money supply growth to 16.5-17 per cent in 2008-09, compared to 20.7 per cent last year. Analysts said that the reduction in broad money growth will entail more tightening, possibly through further CRR hikes.

While credit growth is expected to drop further to around 20 per cent this year compared to a shade below 22 per cent in 2007-08, deposits are estimated to go up 17 per cent. The moves come despite RBI itself acknowledging the downward adjustment in deposit rates even as lending rates have edged up.

Reddy made it clear that the primary objective of the policy is to "ensure monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in the financial markets". Given the policy tools at his disposal, the central bank intends to use all options to manage liquidity.

What has made the governor's task tougher is global uncertainty with elevated food and oil prices and the likelihood of a financial turmoil in the developed markets spilling over to other sectors and emerging economies. While there is forecast of the global economic slowdown intensifying, the central bank expects the Indian economy to grow 8-8.5 per cent driven by investment.

In fact, to argue its case, the central bank has pointed to a strong profit growth, a steady rise in capital goods purchase and imports and continued optimism.

But the central theme remains combating price rise. "Going forward, the resolve is to condition policy and perceptions for inflation in a range of 4-4.5 per cent so that an inflation rate of around 3 per cent becomes a medium term-objective," the policy statement said.

While higher prices upset household budgets, RBI has also warned of the impact on the Centre's deficit indicators, especially with the farm loan debt waiver already announced and the award of the pay panel recommendations expected later this year.