The Reserve Bank of India today indicated that the trend of rising interest rates would continue until inflation and inflationary expectations were contained, even as it stressed the need to improve supplies to bring down prices.
Bankers and economists expect RBI to raise its key rates by a quarter percentage point tomorrow to contain inflation. It has raised repo and reverse repo rates by 25 basis points each since March to contain inflation and reverse the rate cuts made in 2008 and 2009 as part of a stimulus package.
Inflation, based on the wholesale price index, has grown in double digits since February and has become increasingly generalised, RBI said. Non-food manufacturing inflation rose to 7.3 per cent in June from zero in November, showing the impact of rising input costs, recovering private demand and return of pricing power, it added. The impact of increase in fuel prices and increase in minimum support prices, and a possible increase in wages, could be additional factors exerting upward pressure on inflation, it observed.
RBI said the economy was on a steady growth path and could expand faster than its April forecast of 8 per cent. Rise in private consumption and investment demand would be the drivers of growth in the year to March 2011, the central bank said in its report ‘Macroeconomic and monetary developments’ a day before its quarterly monetary policy review.
Professional forecasters had raised their growth estimate for the economy to 8.4 per cent in the year to March 2011, compared with their earlier forecast of 8.2 per cent in May, RBI said.
The central bank is likely to make its forecasts for GDP and inflation in its quarterly review.
Growth in demand for loans, reflecting recovery in the economy, remained buoyant.
Total funds flow to the commercial sector jumped 300 per cent to Rs 2,50,210 crore in April-June from Rs 61,475 crore in the corresponding period last year. The banking system alone accounted for roughly 65 per cent of the flow in the first quarter of 2010-11. Likewise, the production trend in capital goods pointed to continued strong activities in the near term, RBI said.
Moody’s Investor Services today raised India’s local currency rating, saying “a broad range of institutional and structural reforms whose deepening, over time, will result in gradual improvements in the government's financial strength, support fiscal credibility, and improve economic resiliency”.
