RBI builds ground for rate increase, cites high inflation

The central bank may raise repo rate by 25 bps, sees modest growth in second half of this fiscal

The Reserve Bank of India (RBI) seems to have prepared the ground for a repo rate increase - the second straight one in two months - in the second-quarter review of its monetary policy on Tuesday, by saying the inflation rate continues to be above its comfort level.

Growth in the second half of this financial year would be modest, RBI said in its Macroeconomic & Monetary Development Report released, on Monday.

"Wholesale Price Index (WPI) -based inflation is ruling above the Reserve Bank's comfort level and may remain range-bound around the current level during the second half of 2013-14. Moreover, the persistence of high CPI (Consumer Price Index) -based inflation remains a concern," the central bank said.

After declining to a 42-month low of 4.6 per cent in May this year, the rate of headline inflation increased to 6.5 per cent (provisional) in September, driven mainly by a rebound in food and fuel prices. Driven by high food inflation, the rate of retail inflation has remained in double digits. "Risks to inflation are largely in balance from here, though second-round effects from the already high food and fuel inflation in CPI could continue," it said. (HEADING NORTH)

The report said while a good kharif crop could partly mitigate the pressure on food prices, both at the wholesale and retail levels, upside risks - short-term domestic supply-side disturbances, the possibility of unforeseen global oil price rise and possible adverse currency movements - remained. The central bank is widely expected to raise the repo rate 25 basis points to 7.75 per cent and reduce the marginal standing facility rate -raised in mid-July - since the currency has stabilised.

Rajan, who took charge in the first week of September, had in his first policy review clarified fighting inflation was his priority.

The rate of economic growth, which fell to a 17-quarter low of 4.4 per cent in the first quarter, is expected to rebound in the second half of the financial year, given a recovery in agriculture and an improvement in exports. "However, a fuller recovery is likely to start taking shape towards the end of the financial year, on the back of current steps to clear impediments stalling projects," RBI said in its report.