Economists favour 50-bps rate rise

Economists and industry experts favour a stronger dose of policy rate rise in May, as inflation continues to remain stubbornly high.

Most economists who met top officials of the Reserve Bank of India (RBI), including Governor D Subbarao, on Monday, felt inflation had emerged as a key challenge and the central bank’s main objective should be to limit further rise in prices. There was a near-unanimous view that the time was right for an increase of 50 basis points in policy rates. Some even suggested that the rates be raised by 75 basis points.

Ajay Shah, senior fellow at the National Institute of Public Finance & Policy, Shubhashis Gangopadhyay, managing trustee and research director at India Development Foundation and Surjit Bhalla, chairman, Oxus Investments, were among those who attended the meeting.

While economists expressed concern over the low growth rate of the economy (expected at 8 per cent in 2011-12 and lower than the Budget projection of 9 per cent), most of them were ready to settle for a lower growth rate, provided monetary tightening reduced inflation.

Economists said high inflation over a long term would eventually hurt growth. The impact of rising oil prices on inflation and domestic economic growth were also discussed in Monday's meeting.

The Wholesale Price Index stood at 8.98 per cent in March, much higher than RBI’s projection of 8 per cent. Non-food inflation, which is used by the central bank to measure core inflation, rose to 7 per cent year-on-year last month, compared with 6.1 per cent in February. In order to tame inflation, RBI had raised policy rates eight times in the previous financial year.

According to economists, the only silver lining so far was the fact that consumer demand continued to be strong. Government policies should encourage domestic and foreign investment in the infrastructure and manufacturing sectors, the economists felt.

Some analysts, however, suggested RBI should continue with “baby steps” in raising policy rates. “Our view is that a rise of 25 basis points would be favourable. A rise of 50 basis points would be too harsh and can put a brake on the growth trajectory,” said Hemant Mishr, managing director and head of global markets (South Asia), Standard Chartered Bank. He said he expected the average rate of inflation in the current financial year to be 8.4 per cent and that RBI could raise rates by 100 basis points by March 2012.