Monetary tightening to continue till inflation comes down: RBI

Mumbai, July 26 (IANS) The Reserve Bank of India (RBI) Monday said the tightening of the country’s monetary policy would need to continue till inflation was brought down, indicating an upward revision in key policy and interest rates in its quarterly review Tuesday.

‘Given the risks to inclusive growth from high inflation, the monetary unwinding that started in October 2009 should continue till inflation expectations are firmly anchored and inflation is brought down,’ the RBI said in a document — the Macroeconomic and Monetary Developments: First Quarter Review 2010-11.

This document serves as a basis for the first quarterly review.

If the policy rates are revised upwards again Tuesday, this would be the fourth successive hike since January this year. The apex bank has hiked its rates since it decided to tighten its monetary policy – first on Jan 29, followed by another on March 19.

Policy makers have been grappling with measures to rein in high inflation. The overall inflation stood at 10.55 percent in June, while latest data put food inflation above 12 percent.

‘The normalisation of monetary policy of the Reserve Bank in 2010-11 so far has been conditioned by the changing growth-inflation dynamics characterised by robust acceleration in growth and increasing generalisation of inflation,’ said the document.

The RBI was unwilling to effect a hike in interest rates during the 2009, when inflation started to peak, as the economy was still being fuelled to a large extent by the government’s stimulus package which included a lax credit policy.

But with this fiscal’s gross domestic product (GDP) growth predicted upwards of 8 percent, the central bank has increasingly become hawkish over interest rates.

As per the professional forecasters’ survey conducted by the RBI in June 2010, GDP growth rate for 2010-11 will be at 8.4 percent, higher than 8.2 percent reported in the previous round of the survey.

‘Going by the progress of the monsoon so far, agricultural output is expected to be better than last year. Industrial production continues to exhibit double digit growth in the current year; the downside risks to growth are low,’ said the RBI indicating its intent and reasons for effecting another rate hike.

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