Q&A: P K Choudhury, Vice-chairman & group CEO, ICRA

'RBI may continue tightening rates'

P K Choudhury, vice-chairman and group CEO of credit ratings agency ICRA Ltd, says the Reserve Bank of India (RBI) may desist from taking any action in its quarterly policy review on July 27, while continuing to follow monetary tightening in the medium term. Excerpts from an interview to Sumit Sharma.

What are the main challenges RBI needs to take cognisance of in its quarterly monetary policy?
While growth impulses seem robust, inflation indicated by the wholesale price index (WPI) has remained in double digits for five consecutive months despite the monetary tightening undertaken by RBI in the last few quarters. The growth in industrial output has decelerated, albeit to a healthy 11.5 per cent in May, and is expected to moderate further in the coming months as the favourable base effect wears off. The manufacturing growth remains concentrated in a few sectors, emphasising that the economic revival is somewhat uneven.

The prevalent liquidity pressures owing to outflow of funds from the banking system on account of 3G spectrum and broadband auctions and advance tax payments are expected to be transient. Although higher-than-expected revenues from the auctions have afforded a cushion to the central government, around two-thirds of its announced borrowing programme is yet to be completed.

The global economy is recovering and the Indian economy is rebounding after the global slowdown. What does RBI need to do to keep the growth on track while ensuring that there is no overheating?
With growth impulses broadly expected to remain firm in the medium term, RBI may continue to take measured steps towards tightening policy rates in order to contain inflationary expectations and demand-side inflationary pressures.

RBI has raised rates thrice since March. How much of an impact have the rate increases had on the desired objectives?
Despite policy tightening by RBI in recent months, the benchmark WPI inflation rate has remained in double digits for five consecutive months, and at 10.6 per cent in June, accelerated relative to the preceding month.

As opposed to the situation during most months of 2009-10, when food inflation reflecting supply-side pressures dominated the overall inflation, inflation has been dominated by non-food items since March 2010, despite RBI’s monetary tightening measures. However, the pace of industrial growth as indicated by the monthly IIP (Index of Industrial Production) data remains robust, which is an encouraging sign.

Inflation is accelerating and IIP numbers have also picked up. What measures can RBI announce on July 27?
The central bank may wait for some more time before taking any fresh action considering that IIP growth for May was lower than expected and improved monsoon prospects may address some of the concerns related to inflation. Additionally, it may want to observe the impact of the withdrawal of additional liquidity support provided to banks till mid-July before taking any further monetary action.

How much concern from overseas inflows do you foresee as India raises its rates? What measures could India initiate?
Overseas inflows are not expected to be a cause of excessive concern to either systemic liquidity or the rupee-dollar exchange rate in the immediate short term. In the event that inflows are substantially higher than expected, RBI is expected to take necessary steps to manage liquidity.

Where do you see repo and reverse repo rates by October 30?
My guess would be — repo six per cent, reverse repo 4.5 per cent and cash reserve ratio 6.25 per cent.