Money & Banking

Inflation worry may stay RBI hand this time too

Our Bureau Mumbai | Updated on March 12, 2018 Published on October 29, 2012

Monetary Policy Review

The inflation bugbear may prevent the Reserve Bank of India from cutting key policy rates to complement the Government’s recent economic reform efforts and today’s fiscal consolidation plan. In its macroeconomic and monetary developments document released today, the central bank observed that inflation risks persist, warranting a cautious calibration of the policy. It may cut policy rates only ‘down the line’.

However, the RBI may pare the slice of deposits that banks are required to park with it (the cash reserve ratio) by 0.25 to 0.50 percentage points to boost market sentiment. Currently, this ratio is at 4.50 per cent of banks’ deposits.

“Lowering inflation is important from consumer welfare and equity considerations, as also for sustainable growth over the medium-term. If risks to macroeconomy from inflation and twin deficits (fiscal and current account) recede further, that could yield space down the line for monetary policy to respond to growth concerns,” said the RBI.

The RBI said the Government’s reform measures (liberalising foreign direct investment in multi-brand retail, aviation, non-news broadcasting, insurance, pensions and capping fuel subsidies) in themselves are not sufficient to ensure recovery. Their impact would critically hinge on successful implementation.

The RBI said the falling growth cycle appears to have reached its trough. The RBI’s Survey of Professional Forecasters median projection for GDP growth for 2012-13 has been lowered to 5.7 per cent from 6.5 per cent for GDP growth.

Persistent non-food manufactured products inflation, despite the growth slowdown, has emerged as a concern. While the near-term inflation risks are on the upside, inflation should start moderating in the January-March 2013 period, the RBI said.

The Survey has revised upwards the average Wholesale Price Index based inflation is to 7.7 per cent from 7.3 per cent.

Published on October 29, 2012
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