Stronger RBI steps if inflation worsens: Pronab Sen | india | Hindustan Times
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Stronger RBI steps if inflation worsens: Pronab Sen

The Reserve Bank is likely to take tougher action than the Friday's revision in its key policy rates if headline inflation aggravates, says chief statistician Pronab Sen.

india Updated: Mar 21, 2010 13:17 IST

The Reserve Bank is likely to take tougher action than the Friday's revision in its key policy rates if headline inflation aggravates, says chief statistician Pronab Sen.

"If the non-agricultural inflation goes up, the RBI is likely to take much stronger action (in its forthcoming annual monetary policy announcement next month)," Sen told PTI.

In a surprise move late Friday, RBI raised its short-term lending and borrowing rates-- the repo rate (rate at which it lends to banks) and reverse repo rate (rate at which banks park their surplus funds with it)--by 0.25 per cent each to 5 and 3.75 per cent, respectively,to cool off runaway inflation, which has already crossed the central bank's forecast for March at 8.5 per cent, signalling interest rake increase.

The central bank is slated to review its monetary policy on April 20, when further hikes in policy rates are feared.

"Agriculture inflation has started to come off. But non-agricultural inflation has actually risen and that's the one which is of more concern now," Sen said.

Though food inflation has started to moderate, the WPI-based headline inflation has been on the rise since last October, when it was in the negative territory.

Food inflation fell from the near-20 per cent high in December to 16.3 per cent in the week ending March 6. Overall inflation, however, has risen to 9.89 per cent in February from 8.56 per cent in January, driven by the spike in fuel prices in the budget and food articles.

For March, Sen fears a worse inflation figure. He said the current inflation is alarming as prices of non-farm group has gone up and there is real fear of food inflation spilling over to the other sectors of the economy, primarily into the manufacturing sector.

"March will have a very high inflation because of the base effect and the fuel price hike...surely it will be in the double-digit. And hike in rates in April will depend on the inflation figure for March," Sen pointed out.

On Friday's policy action, Sen, who is the secretary in the ministry of statistics and programme implementation, said it is pretty much expected due to rising inflation. However, he said the hike is merely a signal.

"RBI has sent a signal. It has signalled its willingness to hike interest rates, as 25 bps is neither here nor there. It will make no difference. RBI's message is: 'look inflation is a concern and we are willing to take steps'," Sen said.

Sen, however, argued that the repo hikes is not intended to dampen the demand. "It has just sent a signal rather than actually trying to cut down on demand. Intention is not to cut down on demand," he added.

The hike in policy rates is more to set them in line with the hike in cash reserve ratio (CRR) or the amount banks keep with the central bank. In its third quarter policy review on January 29, RBI hiked the CRR by 0.75 percentage point to 5.75 per cent to suck Rs 36,000 crore out from the system.

"The repo hikes more or less validate the CRR hike. After the CRR hike, banks raised both deposit and lending rates. What RBI has done is just aligned its rates with the prevailing market interest rates," he said.