RBI may tighten money supply in 2010: Citigroup

Citigroup expects the Reserve Bank to tighten money supply from 2010 as inflation is likely to rise further.

Citigroup said on Thursday that it expects the Reserve Bank to tighten money supply from 2010 as inflation is likely to rise further,while retaining India’s economic growth forecast at 5.8 per cent for the current fiscal.

Inflation rose to 0.37 per cent for the week ended September 12 from 0.12 per cent a week ago,and Citigroup expected it to be on the uptrend further as base effect will come down.

With the base affect expected to turn in the coming weeks and inflation likely to be on the upward trend,the Reserve Bank may reverse its monetary stance,Citigroup said in the ‘Global Economic Outlook and Strategy’ released today.

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“We expect RBI to begin its policy tightening cycle in 2010 and expect 125 basis points of cumulative hikes in 2010,” the US-based bank said.

The Citigroup also said despite food prices being in the double-digit,trends in the WPI-based inflation will remain benign,but because of the base-effect it will turn upwards.

Analyst said,if Citi expects RBI to signal hike in interest rates from 2010,it means that it is also expecting that economic recovery will be on a strong footing then as the central bank has clearly stated that it will not reverse its monetary stance unless economic upturn is strong.

“An uptrend in inflation coupled with stronger growth in industrial production could prompt a reversal of monetary accommodation earlier,” the Citigroup said.

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Finance Minister Pranab Mukherjee had said in Kolkata yesterday he is not prescribing tigthening of monetary policy. The Reserve Bank is scheduled to come out with quarterly monetary review on October 27.

The Citigroup also said the stimulus packages have blunted the impact of drought. “The governments ongoing stimulus measures seem to have limited the impact of the drought. Incremental data (e.g industrial production,auto sales etc) remain encouraging.

While there is some upside risk to our industry estimate,we are maintaining our forecasts…,” it said.

However,it said,”Despite an improvement in the rainfall in the last few weeks the drought impact on agriculture remains uncertain.”

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While the Finance Ministry expects the economy to grow by over six per cent this fiscal,multilateral lending agency Asian Development Bank pegged it at 6 per cent.

The ADB,recently,revised upwards the country’s GDP projection from the earlier 5 per cent on account of rising business confidence.

India’s economy,which had grown by 6.7 per cent in 2008-09 amid the global economic meltdown,expanded by 6.1 per cent in the first quarter of this fiscal. But there are clear signs of industrial revival as is shown by industrial growth figures and advance tax numbers.