Setting the tone for a hike in key rates, the Reserve Bank of India on Monday said it would continue tightening monetary policy until inflation is tamed.
“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,” said the central bank in its report, Macroeconomic and Monetary Developments: First Quarter Review 2010-11 released on Monday.
The review serves as a background to the first quarter review of monetary policy 2010-11, to be announced on Tuesday.
Headline WPI inflation has been in double-digits since February 2010 and has become increasingly generalised in successive months, the report says.
Non-food manufacturing inflation accelerated from near zero in November 2009 to 7.3 per cent in June 2010, reflecting the impact of rising input costs, recovering private demand and associated return of pricing power.
Experts are not surprised by the central bank’s stand and are expecting policy rates to go up. “Inflation has become the key macro-economic challenge for the economy and hike in policy rates is the main instrument to tame the inflation,” said DK Joshi, principal economist, Crisil.
RBI sees the output and aggregate demand in the Indian economy staying strong in the near future. “Private investment demand recovered sharply in the last quarter of 2009-10. Production trends in capital goods point to continuation of the strong investment activities,” it said.
Disaggregated information such as production of consumer durables and non-durables, auto sales and non-oil imports suggest stronger recovery in private consumption demand going forward.