Like a cricket batsman more keen to guard his wicket than make a risky stroke to get runs, Reserve Bank governor Duvvuri Subbarao clearly showed a bias to fight inflation than go for growth on Tuesday as he raised key policy rates to choke money supply.
“With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations,” RBI said in its monetary policy review, emphasizing in talk what it showed in its walk by raising the repo rate (at which the central bank lends to commercial banks) and the reverse repo rate (at which it borrows from banks).
The RBI has projected an 8.5 per cent GDP growth in 2010-11, but rising demand could stoke inflation. Inflation rate galloped into double digits -- it was 10.6 per cent in June– leaving RBI clearly in no mood to be lenient towards borrowers.
Rising industrial demand is good for growth but bad for price levels. Both capital goods (machines) and consumer goods have seen strong demand that contains seeds of inflation, leading to Subbarao describe the situation as “worrisome.”
WPI inflation has been in double digits since February. The inflation number for food articles, despite some moderation, continues to be in double digits.
Non-food items contributed over 70 per cent to WPI inflation in June 2010, suggesting that inflation is now generalised.