RBI to continue with rate increases, says Moody

Despite economic growth declining to 78 per cent in the fourth quarter of 2010-11, the Reserve Bank of India (RBI) is expected to continue with its tight monetary policy stance to curb inflation, according Moody’s Analytics.

Matthew Circosta, Economist, Moody’s Analytics, said though monetary tightening had weakened investment sharply, private consumption and services continued to expand despite some cooling.

RBI's interest rate increases over the past one year have had their desired effect in cooling the economy, but only modestly. Though manufacturing and services growth declined, they are still growing at a robust pace.

However, pressure on the central bank to curb inflation, remains. More interest rate increases would be needed, since strong population growth and rising incomes maintain an upward pressure on demand-side inflation. RBI had raised the repurchase (repo) rate by 50

basis points to 7.25 per cent on May 3, bringing the cumulative tightening over the past 15 months to 250 basis points, Moody’s said.

HDFC Bank Chief Economist Abheek Barua said Tuesday’s gross domestic product (GDP) data was unlikely to have a material impact on RBI’s monetary policy stance.

Inflation is likely to remain the primary focus for the central bank. RBI is likely to raise the repo rate by 50-75 basis points over the remainder of 2011-12. Given the magnitude of upward revisions to inflation readings over the last six months and the likely pipeline pressures from domestic fuel and input price rises, inflation, as measured by the wholesale price index, is expected is estimated at 9.5-10.5 per cent in the first half of the current financial year, higher than RBI’s estimate of nine per cent, Moody's said.

Art Woo, director, Fitch's Asian Sovereign Ratings group, said looking ahead, GDP growth is likely to remain at around 7.5 per cent for the rest of the year. This is due to the fact that both individuals and corporates are hit by continued inflation pressures and a higher interest rate environment.

“GDP's 7.8 per cent year-on-year rise in the first quarter provides us further confirmation that the Indian economy has clearly hit a soft patch since late 2010,” Fitch said.

Brinda Jagirdar, general manager (economic research), State Bank of India, said core inflation was seen rising. This showed inflationary pressures had shifted from food products to manufactured products, and reinforcing the supply side, especially in the manufacturing sector, would be critical.