The Reserve Bank of India on Monday defended its recent measures of hiking the repo rate and the cash reserve ratio (CRR) over the last quarter. In its review of macro-economic and monetary developments, the central bank said these were necessary to ensure that the instability did not spread and erode the hard-earned gains in the form of growth momentum.
However, the bank did not mention whether these measures have taken any positive effect.
RBI cited that the aggregate demand pressures were reflected in the build up in inflationary expectations (expected course of inflation in future from the present stand point) and other indicators like strong investment demand, sustained high growth in capital goods production, revival of consumer goods production, etc.
RBI review also highlighted the emergence of pressures in fiscal scenario due to enhanced subsidies on account of food, fertiliser and petroleum, oil and lubricants and financing deferred liabilities relating to farm loan waivers. Widening trade deficit though is a concern, is mostly off-set by inflows from non-resident Indians (NRIs) or Indians working abroad.
Inflation is hovering around a 13-year high of 11.89 per cent for the week ended July 12. RBI said that pressures from international food and energy prices have amplified inflationary expectations in India.
Since the April 29, 2008 policy, RBI has hiked the repo rate by 50 basis points (100 basis points equals one per cent) and CRR by 0.75 per cent, respectively. Repo is the rate at which RBI lends money to banks, and CRR the mandatory portion of money that commercial banks are obliged to park with the central bank.
Hiking the repo rate signals rising interest rate trend in the economy, which results in higher interest rate commitments on credit purchases (including loans) — leading to lower demand for goods and services.
However, there were no fears of asset bubbles building in the economy at present, given the equity markets seeking further correction during the April-June quarter building on the previous quarter corrections. Domestic gold prices also eased somewhat during the first quarter of 2008-09, mirroring movements in international prices, which declined by over 8 per cent over the same period.
Inflation based on the wholesale price index (WPI) increased to 11.9 per cent on July 12 from 7.7 per cent at end-March and 4.8 per cent a year ago.
The year-on-year inflation, excluding fuel, was 10.5 per cent as on July 12, 2008 as compared with 6.6 per cent a year ago. The annual average WPI inflation rate (average of 52 weeks) also increased to 6.0 per cent as on July 12, from 4.7 per cent at end-March (5.6 per cent a year ago).