Continuing efforts to balance inflation

Mr Romesh Sobti

MD & CEO, IndusInd Bank

The expectation ahead of monetary policy was straight forward and unanimous. Market stake holders recognised the pressure on inflation and its steady impact on core inflation. There were also apprehensions of slowdown in growth momentum with elevated interest rates and tight system liquidity. The expectation from RBI was to continue its efforts to balance inflation and growth expectations by taking baby step action of 0.25 per cent hike in policy rates for slow move towards the minimum objective of 7 per cent repo rate.

The take-always for now are many. The risk to growth on higher deposit and lending rates and squeeze in system liquidity is recognised. The fear of delay in guiding soft landing of inflation is also recognised. The concern is from the persistence of these factors despite RBI sticking to hawkish monetary stance since March 2010. The negative cues from external sector would continue to exert upward pressure on inflation to make things difficult for RBI to execute its balancing act from now on; thus not ruling out more hawkish stance at the cost of growth momentum. We need to wait for more cues on developments in the western markets to have a clear view on the directional guidance.

Till then, interest rates will continue to stay at elevated levels with repo rate remaining as operative rate for extended period of time. The higher borrowing cost will continue to weigh on growth but higher focus on infrastructure and agriculture in the budget will limit the downside risks. Over all, the balancing act will continue into FY12 with shift of priority to inflation if external factors do not shift to normalcy soon.

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