Growth-inflation to determine RBI's future action, says Gopinath

Concerned over food inflation spreading to other sectors through adverse expectations, Reserve Bank of India (RBI) Deputy Governor Shyamala Gopinath has said the near-term policy challenges will depend on the evolving growth-inflation outcome that supports shifting the focus of the policy to managing recovery and containing inflation.

“RBI has already started the first phase of ‘exit’ in its October 2009 policy statement, though primarily in terms of signaling the stance rather than affecting liquidity conditions or interest rates. The evolving growth-inflation conditions will dictate the future course of action by RBI,” Gopinath said in Bangalore on Monday.

Headline inflation for November shot up to 4.8 per cent, mainly driven by food prices, as compared to 1.3 per cent in the previous month. Food inflation was 19.8 per cent in November.

During the second quarter review of the annual policy, the central bank revised its inflation forecast to 6.5 per cent with an upward bias, above its comfort level of 5 per cent.

“Given the dominance of the food price inflation in shaping the overall course of the inflation path, the policy challenge is to address supply constraints. Since supply shocks take time to taper off, there is risk that high inflation in essential commodities could affect inflation expectations over time and give rise to generalised inflation,” RBI said.

On the growth front, though there are positive indicators like strong performance of the infrastructure sector and industrial recovery, the central bank has expressed concern over the deceleration of private consumption and investment demand, besides a deficient south-west monsoon. Continuous fall in non-food credit growth and negative growth in consumer durables and credit cards, suggesting possible continuation of deceleration in private consumption, were the downside risk for economic growth, RBI said.

Though bank credit growth fell to 11 per cent as on December 4, from 26.3 per cent an year ago, RBI says credit may pick up in the remaining period of the financial year.

“With the economy posting strong growth in the second quarter of the year, credit demand could be expected to pick up, which has already started in the recent fortnights,” Gopinath said.

RBI also said there was a growing perception that India might experience surges in capital inflows again because of easy global liquidity conditions and superior growth prospects.

“Once the recovery gains further strength and sustainability in India, return to the fiscal consolidation path will be critical to contain the constraints to the high growth path. With revival in demand for credit from the private sector, the significance of fiscal consolidation will become more apparent,” she said.