In the latest monetary policy review, the Reserve Bank of India (RBI) has delivered timely policy response to prevailing inflationary pressures in the economy. With the recovery on a firm footing, it is clear that RBI is now focused on containing the elevated inflation levels, even as it paces the monetary tightening process in a predictable manner to hedge against any residual risks to economic growth.
RBI has raised the gross domestic product growth forecast for FY11 to 8.5 per cent from eight per cent. While uncertainty in the global economic situation still poses some risks to the sustenance of recovery, the current economic numbers favour strengthening of the growth momentum.
In contrast, inflation outlook continues to be a cause for concern. RBI has noted that inflation is now much more generalised and is being driven by demand-side factors. While food price inflation has remained at elevated levels for the past year, upward revision in administered prices of petroleum products is expected to add another percentage point to the inflation rate. In addition, a robust recovery is closing the domestic output gap and returning pricing power to producers. The projected Wholesale Price Index for March 2011 has, therefore, been revised upwards to six per cent from 5.5 per cent.
The newly-introduced mid-quarter reviews should provide RBI with greater flexibility in responding to the evolving macro-economic conditions and add greater predictability to the timing of policy measures. Importantly, as RBI observes, in real terms, current policy rates are not consistent with the strong growth momentum. Interest rates may, therefore, continue to rise till such time, as inflation is contained and inflationary expectations are firmly anchored.
Naina Lal Kidwai, Group general manager and country head, HSBC India
