'Battle against inflation to continue in FY12'

Describing the Reserve Bank's decision to hike key policy rates as "just right", Chief Economic Adviser Kaushik Basu today said the battle to combat inflation will continue in 2011-12.

"... The battle against inflation, which we were hoping would end by March or April, would probably continue for some more months," Basu told reporters here. In its third quarterly review today, the Reserve Bank of India (RBI) projected inflation at 7 per cent by March-end.|

Earlier, the apex bank had projected inflation at 5.5 per cent by March, 2011, and the upward revision in the estimate is on account of high food and fuel prices, in addition to demand pressure building up in the economy.

Overall inflation shot up to 8.43 per cent in December, 2010, from 7.48 per cent in November on the back of high prices of food items. Food inflation was in double digits during most of December, 2010, and stood at 15.52 per cent for the week ended January 8.

It had touched a high of 18.32 per cent in December 25. Also, industrial output, as measured by the Index of Industrial Production (IIP), slowed to 2.70 per cent in November, 2010.

"Inflation has gone up during December... However, industrial growth has shown a slowing down and it (RBI) has to balance down between these two. I think the RBI has done just right, which is tighten up a bit by raising the repo rate and on the other hand... Keeping the SLR the way it was," Basu said.

The RBI today also hiked short-term lending and borrowing rates by 0.25 per cent each, aiming to check rising prices rise while spurring growth.

The short-term lending (repo) rate has been increased to 6.5 per cent, while the borrowing (reverse repo) rate has gone up to 5.5 per cent. The RBI also extended the additional liquidity support facility for banks till April 8, 2011.

It has retained the Cash Reserve Ratio (CRR) -- the portion of deposits that banks are required to maintain in cash with the RBI -- at 6 per cent to ensure that the system has enough liquidity to meet loan requirements.