RBI annual policy: Mild hike on the cards

Reema Sharma

Inflation remains the darling of discussions in the forthcoming Annual Policy 2011-12, which would be announced by the Reserve Bank of India (RBI) on 3rd May. Needless to mention, tackling inflation has always been on the priority list of RBI since the beginning of March 2010.

Double digit inflation has time and again haunted policy makers. RBI in its monetary tightening track is expected to hike the key policy rates. Experts have already said that a mild escalation is on the cards. Speculations are rife that RBI might hike the key rates to 25 basis points, ninth time since March 2010, to tame stubborn inflation.

RBI’s Deputy Governor Subir Gokarn has time and again expressed concern over high oil prices and indicated that it would put pressure on the RBI`s strategy to manage inflation. Containing inflation would be the top priority at this juncture as high rate of price rise could hurt economic growth.

RBI review in the last quarter said that upside risks of inflation have increased and it could endanger the growth objective and in the process, amplify risks to inclusive growth.

Although, in a recent report, SMC Global Securities said that food inflation is expected to hover around 8.5 percent in the remaining months of 2011, if the monsoon remains normal as predicted by the meteorological department. Food inflation came back to single digits at 9.5 percent for the week ended March 19 helped by cheaper pulses though vegetables and fruits remained expensive.

On the contrary, global investment banking giant Goldman Sachs has slashed India`s growth forecast for this fiscal to 7.8 percent on account of rise in interest rates and high inflation, way below the government`s forecast of 9 percent growth in 2011-12.

Even as the Prime Minister said the government has a consistent policy to control inflation without hurting growth, food inflation is marking its own trajectory despite the RBI raising the interest rates eight times since March 2010.

Every time the RBI takes this hawkish stance, the fear of a probable hike in home, auto and corporate loans comes to bother the common masses.
However, a hike in interest rates raises the possibility of an increase funding cost of the banks. One cannot also deny the pent-up pressure of the lending rates which often force the banks to upwardly revise their base rates.

This is also true that banks have been reportedly earning high margin because of these funding costs. State Bank of India (SBI) Chairman Pratip Chaudhuri has recently stated that incase rise in the monetary exerted upward pressure on the cost of funds, the bank would review its interest rates.

People at the receiving end are only left with the option to bear the brunt of inflation. Equations say that interest rates are one of the chief tools to fight inflation. But results show that the Reserve Bank has failed miserably to do so. Eight hikes in the past fifteen months could do precious little for the spiralling inflation of this country. Let’s hope that these equations bear the correct outcome this time.