Comments
The Reserve Bank of India, in its third quarter Policy review, has increased the key rates by 25 basis points for the seventh time this fiscal to combat inflation.
Although the central bank has maintained its growth target, concerns over the near-term outlook were raised as growth in industrial production declined to a mere 2.70 per cent year-on-year in November 2010, the lowest in the last 18 months.
Higher inflation target
The WPI Inflation increased from 7.48 per cent in November to 8.43 per cent in December . While food inflation stood at 13.5 per cent, non-food inflation was at 22.3 per cent.
Non-food inflation due to rise in global commodity prices (metals, food, and crude oil) is a huge concern. Persistent high level of prices of WPI index constituents other than food articles also point to a larger structural issue.
Domestic food supply shortage may be attributed to unseasonal rains, but rigidities and leakages in supply chain also contribute to system inefficiencies.
The fact that the central bank has increased the inflation target from 5.5 per cent to 7 per cent by March is also an indicator that inflation may remain high in the near-term.
Effective inflation management calls for monetary measures to be backed by fiscal measures to smoothen the supply-side frictions.
Beyond comfort zone
Although the liquidity situation has improved marginally due to policy measures taken by the central bank in the mid-quarter policy review , it is still well beyond the comfort zone of plus or minus 1 per cent of net demand and time liabilities.
The decision to extend additional support under liquidity adjustment facility (LAF) and second LAF facility till April 8 is expected to provide some cushion to banks.
One of the prime factors contributing to the liquidity crunch has been the widening gap between year-on-year credit and deposit growth rates at 24.4 per cent and 16.5 per cent as of December, 31.
The gap resulted in a sharp increase of non-food credit-deposit ratio to 102 per cent by end-December, up from 58 per cent in the corresponding period of the previous year.
High levels of credit-deposit ratio might again add to inflationary pressures.
Given the consistent high rate of inflation which might endanger the growth outlook, this could be viewed as the central bank's calibrated and cautious approach to strike a fine balance between economic growth and inflation management.
We might see another round of rate hikes before the end of the quarter.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.