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Monday July 27, 08:11 PM
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RBI says signs of inflation firming up
By V. Ramakrishnan and Surojit Gupta
MUMBAI (Reuters) - The Reserve Bank of India said on Monday there were indications of inflation firming up by the end of the year due to increases in commodity prices, easy monetary policy and expansionary fiscal policy.
In its quarterly review of the economy, the Reserve Bank of India (RBI) said food inflation remained high while patchy rains could potentially aggravate it further, and consumer price indices continued to be at elevated levels.
The report was released a day ahead of the RBI's quarterly policy review, at which most economists polled by Reuters expected interest rates to be left unchanged as the government manages a record borrowing programme.
"The inflationary pressures may remain moderate if the protracted global recession leads to dampened commodity prices, agricultural growth remains unaffected despite delayed progress of monsoon and the accommodative monetary policy stance returns to normal levels," the central bank said in its report.
In its June quarter review, the RBI said fiscal consolidation was needed to return the economy to a high growth path. The government has projected the federal fiscal deficit to widen to 6.8 percent of GDP in 2009/10, its highest in 16 years, from 6.0 percent last year.
Also on Monday, Finance Minister Pranab Mukherjee said the economic situation remained difficult and that farm sector output needs to grow at 4 percent a year for broader growth of 9 percent. Still, he told lawmakers he was aiming for growth of 8 to 9 percent by the end of 2010.
India's economic growth slowed to 6.7 percent in the year through March after three years at 9 percent or more.
BORROWING BINGE
In order to bridge its deficit, the government has announced a record borrowing programme of 4.51 trillion rupees ($93.6 billion) in the current fiscal year.
The RBI said dampened private sector demand for credit has helped smooth the way for the government borrowing programme.
Nomura economist Sonal Varma said rates would probably remain unchanged at Tuesday's policy review but expects the central bank to begin unwinding its easy monetary policy later this year.
"It seems that the Reserve Bank of India is still concerned about the growth outlook, due to the delayed monsoon or the global recovery. So the view on growth is still very mixed," she said.
Shubhada Rao, chief economist with Yes Bank (YESBANK.NS : 243.2 -5.35
), said the RBI may revise its inflation forecast upwards on Tuesday but would wait until early 2010, the fiscal fourth quarter, to drain liquidity by lifting cash reserve ratio requirements.
"We believe the RBI will provide comfort on liquidity front. The fourth quarter is the one where we expect the RBI to remove the 'froth' in liquidity," she said.
Analysts polled by Reuters last week expected the central bank to hold key rates steady as growth begins to show some signs of revival while concerns about rising prices were seen deterring further cuts.
Of 25 analysts polled, 22 expected no change in the key repo and reverse-repo rates, and three said the RBI may cut both rates by 25 basis points.
The repo rate , at which the central bank lends cash to banks, is now at 4.75 percent, its lowest in 9 years, and the reverse repo rate , at which it absorbs surplus cash from the banking system, is at 3.25 percent.
The RBI cut its key short-term lending and borrowing rates by 25 basis points each in its April review.
The RBI has cut its short-term lending rate by 425 basis points in six steps since October to support growth. The reverse repo rate, at which the central bank absorbs surplus cash, has been cut by 275 basis points in four steps since December.
(For more news on Reuters Money click http://in.reuters.com/money)
(For full coverage on RBI Quarterly Review click http://in.reuters.com/news/globalcoverage/policyreview)
