Controlling high prices still remain top priority for the Reserve Bank of India and so, it seems, the central bank is all set to hike interest rates.
Stressing that prices of essential commodities are still above comfort levels, Reserve Bank Governor Raghuram Rajan said monetary policy needed to anchor inflationary expectations.
On the eve of his second policy review, Rajan said monetary policy alone is not sufficient to bring the economy back on a high growth trajectory and pitched for complementary fiscal and regulatory policies, including a fuel price hike.
An RBI-sponsored survey drastically lowered the GDP growth forecast for the current financial year to 4.8 per cent from the previous projection of 5.7 per cent.
“The monetary policy will need to aim at anchoring inflation expectations, while appropriately addressing growth risks,” Rajan said in the Macroeconomic and Monetary Developments Second Quarter Review.
The report said that both wholesale price and consumer price inflation may stay range-bound around current levels and remain above “comfort levels.” High food prices, especially of onions and some other vegetables, pushed up WPI inflation to a seven-month high of 6.46 per cent in September.
Inflation as measured by the wholesale price index (WPI) rose for the fourth month in a row. Inflation was 6.1 per cent in August and 5.85 per cent (revised upward from 5.79 per cent) in July. In September last year, it was 8.07 per cent.
Rajan indicated that special measures taken by the RBI to contain exchange rate volatility would be gradually reversed.
The RBI has already reduced the marginal standing facility rate, at which it lends emergency funds to banks, by 1.25 per cent in two tranches since September 20 to 9 per cent.
“With the normalisation of exceptional monetary measures under way, incremental calibration will be shaped by changes in the growth-inflation balance, keeping macroeconomic stability in consideration,” Rajan said.
As the exceptional measures are rolled back with theimprovement in exchange market conditions, it is important to keep this balance in view,” the report said.
An RBI study of professional forecasters said the average WPI inflation will climb to 6 per cent from the earlier median expectation of 5.3 per cent, while on the growth front, they reduced the projection for the current fiscal to 4.8 per cent from 5.7 per cent earlier.
“A fuller recovery is likely to start taking shape towards the end of the fiscal year when current steps to clear the logjams constraining economic activity seep through the various inter-sectoral linkages in the economy,” the report said.
“We can expect a modest recovery in growth in the second half on good monsoon and an uptick in exports and industrial production,” it said.
Acknowledging that growth has dipped below potential, Rajan said a revival will require “complementary monetary, fiscal and regulatory policies,” apart from increasing fuel prices to contain demand, productivity enhancement and quick project implementation.
The report noted that India has faced markedly higher inflation even when compared to its emerging market peers in recent years.
“This makes it important to keep liquidity under check and the policy rate at a reasonable level to anchor inflation expectations, with a view to ensuring stable macro-financial conditions and positive real returns to savers,” it said.
In bid to check inflation, Rajan surprised the markets by increasing the repo rate by 0.25 per cent in his first policy review last month.