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HindustanTimes Thu,18 Dec 2014

Prices to stay high, says Reserve Bank of India

HT Correspondent, Hindustan Times  New Delhi, August 01, 2012
First Published: 01:01 IST(1/8/2012) | Last Updated: 01:04 IST(1/8/2012)

The Indian consumer is set to feel the pinch of high prices well into next year, the Reserve Bank of India warned on Tuesday, dashing any hopes of lower borrowing costs even as it took the knife to its economic growth forecast.

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The central bank, as part of its quarterly monetary policy review, said it expected wholesale inflation to touch 7% by March 2013, lower than the current 7.2% but unlikely to be enough to allow it to cut interest rates and stimulate borrowing and consumer spending.

"The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term," said RBI governor D Subbarao, as the bank cut its forecast for the year ending March 2013 to 6.8% from 7.3%, an estimate made as recently as April.

A patchy monsoon has driven food prices sharply higher.

The central bank's gloomy prognosis came on a day when agriculture minister Sharad Pawar acknowledged "drought-like" conditions in more than half of the country's 627 districts.

Pawar also announced nearly Rs. 2,000 crore in assistance to 16 states. He said the situation could turn out to be more serious than it was in 2009, when India had its worst drought in three decades. Farm income supports a third of Indians.

Deficient rains have lifted retail prices of vegetables by 28% year on year, while milk and allied products have shot up 13.2%.

High borrowing and raw material costs have forced companies to defer capacity expansion plans, hurt job prospects and shaved overall economic growth.

In the first three months of the current year, India's gross domestic product (GDP) grew 5.3% from a year earlier, the slowest quarterly pace in a decade, taking the steam out of what were the few engines of global growth.

What's more, the high interest rates have jacked up the amount home buyers have to set aside monthly for paying back loans, leaving less in their pockets for buying televisions and cars, activities that would have spurred the economy.

"In the last three years the EMI on my home loan has gone up by 25%. My monthly fuel bills have doubled. So, to ensure that we don't default on EMIs, we have cut on expenses such as eating out and vacations," said Sudhir Verma, a Delhi-based independent marketing consultant.

"The only viable option left is to sell some ancestral property, earn a lump sum amount, and pay off a bit of my existing home loan," Verma said.

The RBI kept its key lending rate unchanged at 8% for the second time in two months, but offered a sop to borrowers by cutting the statutory liquidity ratio (SLR) - or the proportion of money that banks have to invest in gold and government bonds-by one percentage point to 23%.

This would free up an estimated Rs. 62,000 crore for lending.


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