RBI hints at hike policy rates to contain inflation

Mumbai, July 26 (PTI) Hinting at a hike in its key rates
Tuesday, the Reserve Bank of India Monday said it would
continue exiting from its easy money regime to check
double-digit inflation, while ensuring stable economic growth.

"Given the risk to inclusive growth from high inflation,
the monetary unwinding that started in October, 2009 should
continue till inflation expectations are firmly anchored and
inflation is brought down," RBI said in its macroeconomic
report.
The Reserve Bank is set to unveil its quarterly review of
the annual monetary policy Tuesday. It is widely expected to
hike its short-term lending and borrowing rates (repo and
reverse repo) by at least 0.25 per cent each to tame
inflation, which was 10.55 per cent in June.
"The major policy concern... would be to contain
inflationary pressures and anchor inflationary expectations,"
the central bank said.
The wholesale inflation is in double digits for the
past five months due to high food and fuel prices against RBI
forecast of 5.5 per cent by end-March.
According to economists, the headline inflation is no
longer confined to food items but has spread to manufactured
products.
Citing a continuing growth momentum, the Reserve Bank
professional forecasters upped their 2010-11 GDP growth
projection to 8.4 per cent against 8.2 per cent reported in
the previous survey.
However, the apex bank cautioned that uncertain external
environment is a major risk to growth in the near-term.

Referring to the prevailing tight cash conditions in
the system, RBI said the liquidity situation will ease but
"the calibrated normalisation of monetary policy may not lead
to return of the persistent easy liquidity conditions that
prevailed last year".
The banking system faced an unprecedented tight cash
conditions since early June on account of nearly Rs 1.36
lakh crore flowing out of the system due to payments for 3G
and broadband wireless auctions and advance tax outgo.
Noting that credit growth in banking system has been
picking up, led by state-owned banks, RBI said that there is a
need for banks to step up deposit mobilization to meet credit
demand.
Further, the apex bank said that a sustained and a rapid
rise in housing prices over successive quarters was an area of
concern from the standpoint of their possible spill over to
demand pressures, general price level as well as financial
stability. PTI DU
KAB