RBI hints at further rate rise

The Reserve Bank of India (RBI) indicated another round of policy rate increases with Governor D Subbarao suggesting more monetary tightening to manage inflationary expectations.

“It is better to act now (on rising inflation). It is possible that some growth may be sacrificed in the near term,” he said at the convocation ceremony of Indira Gandhi Institute of Development Research (IGIDR).

He added that the central bank would continue exiting its accommodative monetary policy, but warned that India might have to exit faster than others because “inflation is coming on us fiercely”.

Last week, RBI raised key policy rates — the repo and reverse repo — 25 basis points each to curb inflation. Economists expect Subbarao to announce a further 25-basis point increase in the annual policy statement, due on April 20.

Subbarao said inflationary pressures were building up and this was no longer just a supply-side issue, pressure was also rising from the demand side, he added, pointing to higher capacity utilisation.

“The capacity utilisation is 72 per cent now. The highest capacity utilisation we saw was 76 per cent in 2007-08. This shows that demand-side pressure on inflation can build up,” Subbarao said.

He said the contribution of food to inflation had come down from 100 per cent in November to 52 per cent now. He also pointed out that inflation in the economy was suppressed because various sectors were under administered prices.

By the end of the year, the increase in policy rates could be 100 basis points, while tightening liquidity, through an increase in the cash reserve ratio (CRR), is also predicted. In January, RBI had announced a 75 basis point increase in CRR to suck out Rs 36,000 crore from the system.

Since then, inflation has climbed to 9.89 per cent and the RBI and the government expect it to move up to double digits this month.

At the same time, industrial output is grew 16.7 per cent in January. Bank credit growth, which fell to single digit, has picked up and was estimated at over 15 per cent.

Kaushik Basu, the government’s chief economic advisor, later told reporters that RBI was not behind the curve in fighting price rise, as some economists suggested.

“We may have one more month of high inflation due to the base effect. Later, it will fall to very low levels. The average WPI (wholesale price index) inflation for 2009-10 would not cross 4 per cent,” Basu said.