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Being faced with the delicate task of combating inflation without hurting growth, the RBI has chosen to follow the Chinese wisdom of ‘crossing the river by feeling the stones'.
In the circumstances, the RBI has resumed hiking policy rates to signal inflationary pressures and expectations are far from over.
The base line projection of WPI inflation for March 2011 has been revised upwards to 7 per cent from 5.5 per cent.
At the same time, the increase in repo and reverse repo rates have been kept at 25 basis points so as not to derail the 8 per cent plus growth anticipated for the current fiscal.
The substantial task of reining in inflation may be left to the forthcoming budget which can address the demand-side and supply-side factors underlying persistent inflationary pressures more effectively.
Reining in inflation
The next policy review by mid-March may be a more appropriate time to frame a suitable monetary policy stance as that would give time to the various anti-inflationary measures, both on the demand-side and supply-side, already taken to work themselves out.
The RBI has sympathetically considered the banks' genuine need for more liquidity to fund the anticipated 25 per cent plus growth in credit offtake. In the last Policy, the RBI had announced a buy back calendar to the tune of Rs 48,000 crore for December - January 2011 of which a sum of Rs 37,068 crore has already been completed.
The additional liquidity support to banks under the LAF to the extent of up to one per cent of their net demand and time liabilities (NDTL), currently set to expire on January 28, has been extended up to April 8. .
Banks have also been given waiver of penal interest for any SLR shortfall on account of using this facility.
The second LAF (SLAF) will be conducted on a daily basis up to April 8. Increased government spending is expected to ease the liquidity shortfall currently around Rs 1 lakh crore.
Nevertheless, the pressure on short-term money market rates and bond yields is expected to continue with an upward bias, till inflation is brought within the comfort zone.
(The author is CMD, IOB.)
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