Inflation control tops RBI agenda

Mumbai, July 25: The professional forecasters — who have been polled by the Reserve Bank of India before every monetary policy review since September 2007 — have trimmed their GDP growth forecast for this fiscal to 7.9 per cent from 8.2 per cent in March, but the RBI is emphatic that it will stick to its tight monetary policy “till there is credible evidence of inflation trending close to a level” that is within its comfort zone.

The inflation versus growth debate — which has polarised industry and policymakers over the wisdom of pursuing an inflation-busting strategy at the risk of engineering a slowdown — clearly isn’t going to throw the RBI off its 16-month monetary tightening cycle during which governor Duvvuri Subbarao has raised key rates 10 times.

With inflation running high at 9.5 per cent — far above the RBI’s forecast of 6 per cent by the end of March next year — the strong signal that is going out today in its customary report on macroeconomic and monetary developments that precedes every policy review is that an increase of at least 25 basis points in the repo rate is likely tomorrow when the policy mandarins meet for the third time since the start of this fiscal.

The RBI said in the report that growth was showing signs of moderation and was likely to decelerate this fiscal. However, the apex bank was quick to add that it would stay close to the trend (around 8 per cent). Its policy statement in May had placed the baseline projection at around 8 per cent with a 90 per cent probability of falling in the 7.4-8.5 per cent range. “Though the downside risks have since increased, growth is likely to stay near the trend,” the report said.

It explained that the downside risks to growth emerge from uncertainties relating to the south-west monsoon, likely moderation in private consumption and investment demand, high input costs, rising cost of capital and uncertain global outlook. Agricultural growth, it added, may turn out to be lower because of high growth seen last year.

The RBI said various business expectation surveys also see moderation over the previous quarter and year, indicating a slowdown in overall economic activity. Besides persistent inflation, which was the significant factor that affected business expectations, global uncertainty, higher input costs, higher interest rates and expectation of lower demand for finished goods also impacted the business sentiment of India Inc.

However, the central bank was clear that despite such a moderation in growth, the challenge was to contain inflationary pressures. “The policy exigency at this juncture warrants continuation of anti-inflationary stance to tame inflation and anchor inflationary expectations,” it observed.

According to the RBI, though there may be some relief in the short run on the inflation front because of softening of global commodity prices, price pressures will persist on account of a combination of demand side factors and “structural drivers’’.