Governor says inflation pressure may moderate after July, but will be a challenge.
The Reserve Bank of India (RBI) today said it was unlikely to change its policy in between quarterly reviews unless there was an unanticipated event.
“A mid-policy action is really in response to a completely unanticipated event. We will watch how inflation moves in the next few months. The way we are seeing inflation pressure pan out, we see inflation at 8.5 percent by March and that may start to moderate… Of course, unforeseen events may provoke us to think about it (mid-policy action). But, the scenario we are working on is, inflation will drive up till March and then plateau after March. In that event, there is no case for a mid-policy action,” Deputy Governor Subir Gokarn said during a conference call with analysts and researchers today.
This was the first time the central bank had organised a post-policy call.
The statement from the central bank came amid expectations that it would raise policy rates between now and late April, when the annual policy statement for 2010-11 is due to be unveiled. On Friday, RBI had announced a 75 basis point increase in the cash reserve ratio (CRR), the proportion of deposits that banks keep aside, but held key interest rates steady.
The central bank had also increased the growth projection for this year to 7.5 per cent, from 6 per cent estimated earlier, while inflation is estimated to rise from 7.3 per cent at the end of December to 8.5 per cent at the end of March, which was 200 basis points above the earlier estimate.
Governor D Subbarao said that April onwards, RBI planned to put out long-term forecasts on key variables such as economic growth.
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He also said there could be pressure on bond yields to rise if government borrowing is sharply higher than what the central bank has estimated. RBI expected the Centre’s gross borrowings to go beyond this year’s level of Rs 451,000 crore, even after assuming a fiscal deficit at 5.5 per cent of gross domestic product for next year.
He said the government borrowing estimates were based on the numbers put out by the government in July. “On that basis, we believe that the absolute amount of borrowing in net terms will be congruable to the absolute amount of borrowing this year. In gross terms, it might be slightly higher because of the redemptions,” Subbarao said.
“And, of course, there are going to be challenges in managing the government borrowing next year. The most important, of course, is the anticipated pick-up in private credit. The second is the inflation pressures being higher than they were during this year. And, even though I note we said in our document that inflation pressures will start abating from July onwards, pressures will still be higher than what they were last year,” he added.
The governor said that there would be a third challenge, too, as the central bank had limited room for liquidity management. “So, if the government borrowing happens to be higher than what we have estimated, there would, of course, be pressure on yields,” he said.
Deputy Governor Shyamala Gopinath added that RBI will calibrate its operations and the instruments used to manage government borrowing. “We have to let the yields span out as per demand-supply and inflation expectations,” she said.