With inflation ruling above its comfort level, the Reserve Bank of India on Monday hinted at a hike in repo rate, saying monetary policy must anchor inflationary expectations.
At its second monetary policy review on Tuesday, the RBI may raise the repo rate (the interest rate at which it lends short-term money to banks) further by 25-50 basis points to 7.75-8.00 per cent.
The RBI had hiked the repo rate by 25 basis points to 7.50 per cent in its mid-quarter review of the monetary policy in September.
In its Macroeconomic and Monetary Developments document, released on the eve of the second quarter review of the monetary policy, the central bank said inflation–based on wholesale price index is ruling above its comfort level and may remain range bound around the current level during the October 2013-March 2014 period.
WPI inflation, which had declined to a 42-month low of 4.6 per cent in May, increased to 6.5 per cent (provisional) in September 2013, driven by a rebound in food and fuel prices.
Another indication that the central bank may persist with its tight monetary policy stance comes from its comments on consumer price index (CPI)-based inflation. It said “the persistence of high CPI inflation, which continued to remain near double-digit levels driven by high food inflation, remains a concern.”
While on the one hand, the RBI may push up the repo rate by 25 basis points, on the other, it may cut the marginal standing facility rate by an equivalent measure.
With regard to MSF, the RBI said, “With the process of normalisation of monetary measures making headway, monetary policy ahead would depend on how the growth-inflation dynamics evolve.”
The RBI has cut the MSF rate by 125 basis points since mid-September to 9 per cent. MSF is an emergency liquidity facility whereby banks can borrow up to 2.5 per cent of their deposits. “Liquidity conditions will have to be maintained at an appropriate level keeping in view the persistence in CPI inflation as also the slack growth conditions,” the RBI said.
The RBI expects a modest improvement in growth in the second half of 2013-14 following a rebound in agriculture and an improvement in exports. However, a fuller recovery is likely to start taking shape towards the end of the fiscal year on the back of current steps to clear impediments that were stalling projects.
With deceleration in private consumption and fall in investment, overall demand conditions remain weak, the central bank said.
However, a good monsoon and pick-up in exports, if sustained, could provide some momentum. At this stage, demand management requires balancing fiscal consolidation with investment support.