‘Premature to change policy stance’

The central bank also hinted at further rate hikes in the future. Retaining its hawkishness and unflinching resolve to maintain an anti-inflationary stance,the RBI said,“a premature change in the policy stance could harden inflationary expectations,thereby diluting the impact of past policy actions. It is,therefore,imperative to persist with the current anti-inflationary stance. Going forward,the stance will be influenced by signs of downward movement in the inflation trajectory,to which the moderation in demand is expected to contribute,and the implications of global developments.” As the monetary policy operates with a lag,the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12,it said.

Hiking the rates,the RBI said developments in the global economy over the past few weeks are a matter of serious concern. Growth momentum is weakening in the advanced economies amidst heightened concerns that recovery may take longer than expected earlier. Although India’s exports have performed extremely well in the recent period,this trend is unlikely to be sustained in the face of weakening global demand. “This,combined with the slowing down of domestic demand,to which the monetary policy stance is also contributing,suggests that risks to the growth projection for 2011-12 made in the July Review are on the downside,” it said.

Global crude oil prices have remained elevated despite weakening of global recovery. Moreover,there is still an element of suppressed inflation. Though global oil prices have moderated,the pass-through to domestic prices remains incomplete. Also,current administered electricity prices are yet to reflect increase in input prices,even as many states have initiated increases. “Food inflation is at near-double digit levels,despite normal monsoons,underlining the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon. The inflation momentum,reflected in the de-seasonalised sequential monthly data,persists,” the RBI said.

Since the Reserve Bank’s First Quarter Review of July 26,the global macroeconomic outlook has worsened. “There is growing consensus that sluggishness will persist longer than earlier expected. Concerns over the sovereign debt problem in the euro area have added further uncertainty to the prospects of recovery,” it said.

“Domestically,even as many indicators point to moderating growth,both headline and non-food manufactured products inflation are at uncomfortably high levels. Crude oil prices remain high. Food price inflation persists notwithstanding a normal monsoon,” the RBI said. Inflationary pressures are expected to ease towards the later part of 2011-12. Stabilisation of energy prices and moderating domestic demand should facilitate this process. However,in the current scenario,with the likelihood of inflation remaining high for the next few months,rising inflationary expectations remain a key risk. This makes it imperative to persevere with the current anti-inflationary stance,it said.

Assessment

Global economy: In recent weeks,global financial markets have been rattled by perceptions of inadequate solutions to the euro area sovereign debt problem,exposure of banks to euro area sovereign debt and renewed fears of recession. Global recovery will also be affected by fiscal consolidation measures in some of the advanced economies

Growth: GDP growth decelerated to 7.7 per cent in Q1 of 2011-12 from 7.8 per cent in the previous quarter. Agricultural growth has accelerated,but industry,services have decelerated

Inflation: Year-on-year non-food manufactured products inflation rose from 7.5 per cent in July to 7.7 per cent in August 2011 suggesting as yet persistent demand pressures. The OMCs raised the price of petrol by Rs 3.14 per litre with effect from September 16. This will have a direct impact of 7 bps to WPI inflation