Despite the recent spate of concerns about moderating growth, the Reserve Bank of India came out with guns blazing against inflation. The higher than expected 50 basis points hike caught the pundits and markets wrong footed. The bank also took the government to task for being lax on fiscal policy.
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In its statement the bank said that one of the expected outcomes of the policy action was to “reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required.â€
In other words, the RBI blames government policies (or the lack of them) as one reason for the stiffer rate hike.
More importantly, the bank has raised its inflation target for the fiscal year end by one percentage point to 7%. The statement noted that food inflation might not fall as previously expected “because the spatial distribution of (the monsoon rains) indicate possible pressures on yields of coarse grains, pulses, oilseeds and cotton.â€
It also referred to the recent hike in minimum support prices and the round of fuel price increases as triggers for inflation. The bank also noted the possibility that commodity prices may still go up because of abundant liquidity even if demand is subdued.
The bank is not overly concerned about growth moderating. It says that it will “manage the risk of growth falling significantly below trend.†It retained its GDP growth forecast for this fiscal at 8%.
In sum, the central bank will continue to fight inflation and the hawkish policy statement signals more rate hikes in the offing. The only question is whether RBI couldn’t have done this a few months earlier when the signs were equally clear?
