Elevated inflation levels point to ineffectiveness of rate rises: D&B

With inflation staying above nine per cent levels since December 2010, Reserve Bank of India’s (RBI) aggressive rate rises are being questioned, owing to their inability to curb price rise and manage inflationary expectations.

Dun & Bradstreet, a business information and knowledge company, said inflation, as measured by the wholesale price index, had been hovering above nine per cent since December 2010, despite RBI pursuing an aggressive monetary tightening policy. It pointed to the fact that the transmission of monetary policy signals to the real economy had not been fully effective.

Now, the focus should be on factors which were acting as hindrances to the effectiveness of the rising interest rates in controlling inflation, the report said. Resolving the supply side bottlenecks and the effective policy guidelines could ensure these difficulties could be overcome to some extent, it said.

However, some economists have differed with this view, saying banks had responded to RBI’s rate rises by increasing their lending rates. Madan Sabnavis, chief economist, CARE, said the rise in policy rates since March 2010 had resulted in banks increasing their lending rates. As a result, the credit demand, along with overall demand, moderated. However, Sabnavis admitted inflation was yet to come down. RBI’s justification for another rate rise could be there was still scope for action and without action taken in the last 18 months, things would have been much different, perhaps worse, Sabanavis said.

A Prasanna, chief economist, ICICI Securities Primary Dealership, said steps by RBI had shown their effect. He expects RBI to raise the repo rate by 25 basis points in the upcoming policy review, since inflation is still sticky, and there are upside risks to inflation from fuel and electricity prices.

Brindra Jagirdar, general manager, Economic Research, said RBI’s actions had definitely moderated demand. The effect on inflation would come with a lag (12-18 months). Referring to RBI’s future course of action, Arun Singh, senior economist, Dun & Bradstreet, India, said a rise would reinforce the impact of the last increase. There might be a deceleration in inflation if RBI raises key policy rates another time, and holds on to the rates for two to four quarters, if growth continued to be reasonable.