Inflation rate needs to be lowered for growth: RBI

Despite drastic slowdown seen in industrial growth numbers in December, the Reserve Bank of India (RBI) is expected to continue raising the policy rates as inflation remains stubbornly high, analysts said. The central bank also said today that inflation needs to be controlled if growth has to be sustained.

RBI, in its third quarter review of monetary policy, maintained that its focus remains on containing inflation and inflationary expectations. Today, Deputy Governor K C Chakrabarty reiterated that inflation needs to be controlled. “The concern is on both sides (growth and inflation). We must understand ultimately if inflation is not controlled you cannot sustain high growth rate,” said Chakrabarty on the sidelines of an event here.

Annual growth in index of Industrial Production (IIP) was up only 1.6 per cent in December 2010, whereas in November it was 3.6 per cent (after a one-time revision). Last year in December, IIP had recorded annual growth of 16 per cent.

“Given the very high base, we expect industrial growth to remain in single digits for the next few months,” said Rohini Malkani and Anushka Shah from Citigroup global markets.

Economists said unless inflation showed some sign of moderation, RBI will not change its stance. Headline inflation, measured by the Wholesale Price Index (WPI) was at 8.43 per cent in December higher than 7.48 per cent in November. RBI projects seven per cent by March-end.

“RBI is completely focused on controlling inflation. Unless inflation starts showing some signs of moderation, RBI will not change its mind,” said Abheek Barua, economist, HDFC Bank. Barua expects RBI to raise key policy rates by 25 basis points each during the mid-quarter policy review on March 17, followed by a couple of increases by December.