The Reserve Bank of India (RBI) is faced with the dilemma of either supporting the recovery of the economy or containing the fear of inflation, says Moody's economy.com.
"Although growth apparently recovered in the first quarter, the RBI is still confronted with a dilemma, a case for monetary tightening can be made, yet higher interest rates could choke off fledgling recovery," Moody's Corp research and analyis arm Moody's economy.com said.
India's money supply is growing quickly, asset prices are booming, firms' borrowing costs are steep and the economy is working to recover from a downturn, Moody's economy.com associate economist Nikhilesh Bhattacharyya said.
"The RBI finds itself in a tricky position... If faster monetary growth were to persist as the economy recovers, it would feed inflation... Higher interest rates could jeopardize the recovery, but not raising them also carries risk," Bhattacharyya said.
However, the RBI is unlikely to increase rates. Despite a growing case for monetary tightening, the probability that the RBI will hike rates in the near term seems slim, and market believes the central bank still has an easing bias, he said.
"A preemptive rate hike to stop surging asset prices and monetary growth is unlikely. But standing by and doing nothing or cutting rates further may create problems down the road," he said adding the economy needs fast growth to create jobs.
