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RBI hints at tightening monetary policy

Mumbai: India’s central bank Thursday set the stage for tightening the monetary policy in the quarterly update due Friday with concerns over rising inflation even as it upgraded the country’s growth outlook for this fiscal to 6.9 per cent from 6 per cent. "With a stronger recovery in India, the risk of food price inflation causing generalised inflation cannot be ignored," the Reserve Bank of India (RBI) said in its review of the macroeconomic developments for the third quarter. "Reining inflation and inflationary expectations while carefully nurturing the growth impulses will be the main challenge for the conduct of monetary policy during the remaining period of the year," the central bank added. The report said the turnaround in the country’s growth during the first quarter of 2009-10 was sustained in the second quarter, spurred by robust revival in industrial output and services, despite a subdued performance by the farm sector. "The industrial recovery, besides exhibiting acceleration in the last few months, has also become more broad based. Most of the lead indicators of services sector activities also suggest revival in growth momentum." Some of the highlights of the report include: - Prediction for overall economic growth raised to 6.9 per cent from 6 per cent - Agriculture growth outlook revised upward to (-)0.9 per cent from (-)1.4 per cent - Outlook for industrial output growth raised to 8.4 per cent from 6.3 per cent - Forecast for growth in services revised to 8.7 per cent from 8.1 per cent - Employment outlook improving and firms expected to increase workforce - Deficient monsoon will lower grain production and oilseeds by 16 per cent - Food prices may ease after arrival of new crop and release of government buffer stocks - Increased capital inflows and domestic liquidity will stroke rising inflation - Managing growth needs with rising inflation a delicate task - Merchandise exports witnessed a turnaround after 13 consecutive months of decline - The pace of contraction in imports has also moderated significantly - Industry likely to increase selling price of merchandise - Expected rise in demand for short term funds from the private sector in coming months. Indian Industry feels that given the current state of play, RBI Governor D. Subbarao may hike cash reserve ratio (CRR) for commercial banks to suck excess liquidity and rein in inflation in the third quarterly review of the monetary policy for this fiscal Friday. CRR is the minimum liquid assets commercial banks have to retain against deposits. A hike of 100 basis points in CRR has the potential to suck out about Rs.40,000 crore from the system. A survey of economists from the banking and financial services sector by the Federation of Indian Chambers of Commerce and Industry (FICCI) saw the respondents anticipate a 50 basis points cut in CRR, as part of the move to tighten the monetary policy. "A hike in CRR at this point in time may tone down the inflationary expectations that are building in the economy but would fail to arrest inflation as it is not a monetary phenomenon," said a statement based on the FICCI survey.

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