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Reserve Bank puts inflation control above GDP growth

business Updated: Jul 26, 2011 01:30 IST
HT Correspondent
HT Correspondent
Hindustan Times
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Setting the tone for a hike in interest rates for the eleventh time in 16 months when it meets for its monetary policy review on Tuesday, the Reserve Bank of India (RBI) on Monday said that prices warrant the continuation of an anti-inflationary monetary stance.

“Near-term upside risks to inflation remain significant,” the RBI said in its Macroeconomic and Monetary Developments First Quarter Review 2011-12.

The regulator has said that it is ready to sacrifice growth in order to tame inflation.

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“Notwithstanding the slowdown in growth, high inflation requires continued anti-inflationary bias with a close watch and responsiveness to new information,” said the central bank. In its struggle to control inflation the central bank has hiked repo rate 10 times by a total of 275 basis points (100 basis points is 1 percentage point) since March 2010.

Repo rate, currently at 7.5%, is the rate at which commercial banks borrow from the RBI. However, even after successive rate hikes, inflation as measured by the wholesale price index (WPI), stood at 9.4% in June 2011 and has been hovering around 9%-9.75% in the last seven months.

Going forward, the risk to growth and inflation projections may arise if monsoon significantly deviates from its normal course, global commodity prices collapse or the eurozone debt crisis assumes full-blown proportions.

However, the central bank expects inflation to come down in the later part of the year.

“Price pressures are expected to persist through Q2 as well and then moderate towards the later part of 2011-12,” it said.

The RBI said a survey of professional forecasters put the GDP growth for the current fiscal year at 8%. Its own estimate is expected to be announced on Tuesday along with other views.