3/17/2011 Mint view | RBI gets more hawkish - Vi…

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The combination of a tighter fiscal polic y and a
Families in Business tighter monetary policy will make it diffic ult for the
Indian ec onomy to grow at 9% in FY12
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Perhaps the most significant part of the monetary policy
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1
statement released by the Reserve Bank of India (RBI)
on Thursday is not the increase in its tw o policy interest Like
rates by 25 basis points each. That w as widely
expected. Of more value is its guidance on inflation because it tells us how
RBI assesses risks to price stability at this point in time. The Indian central
bank now expects wholesale price inflation of 8% in March, a full percentage
point higher than the number in the third quarter review in January, when
governor D. Subbarao had unambiguously described inflation as his
“dominant concern”.

Inflation dynamics have changed considerably over the past two years. The
initial push came from high food prices. The latest inflation data released by
the government this month shows that food inflation is southbound but core
inflation is climbing. Household surveys show that high inflation expectations
are getting embedded in economic decisions. The rise in global crude oil
Oil: pump or store?
prices is bound to feed into domestic prices as w ell. Meanwhile, RBI has said
Reviews that high prices of proteins could be sticky because of “structural demand- IMF’s cathartic moment

Mint 50 supply imbalances”. Editors’ take

Editors’ Takes
Environment Even though the Indian central bank does not have an explicit inflation
RBI flags growth concerns even as hike rolls in
Elections 2009 target that it has to meet, the latest inflation guidance gives us some idea
how far behind the curve is currently is. It has increased the repo rate by Food inflation eases marginally to 9.42% from
Book Reviews 9.48%
200 basis points since March 2010 but inflation has stayed ahead of the cost
Profiles of money. So real interest rates continue to be negative. The important thing Are recent GDP downgrades justified?

Blogs to watch out for is whether inflation w ill ease in the months ahead (as the Honing monetary policy tools
finance ministry keeps indicating) or w hether more aggressive interest rate
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hikes w ill be necessary. Our guess is that policy rates have to go up by at
Videos least another 50-75 basis points.
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Will that be bad new s for grow th? The tightness in the domestic money
Mint Reports market has ensured that banks have already raised their deposit and
Webcast Archive lending rates aggressively in last three months, so the actual interest rates
for depositors and borrowers could already be close to their medium-term
Partners
peaks. So companies, homeow ners and buyers of consumer goods may not
Wall Street Journal see their interest costs spike dramatically.
Tools
Yet, the combination of a tighter fiscal policy and a tighter monetary policy
Mint Mobile will make it difficult for the Indian economy to grow at 9% in FY12, as
RSS Feeds expected by the government. Private forecasters are already predicting a
RSS Story
mild slow down in economic activity during the next fiscal.
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3/17/2011 Mint view | RBI gets more hawkish - Vi…
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