RBI went against majority view of lower hike to tame inflation

Mumbai: Rejecting the majority view of lower increase in key policy rates, RBI opted for 50 basis points hike in its short-term lending rates to contain inflationary expectations.

“While four members of the Committee were of the view that the repo and reverse repo rates be raised by 25 basis points each, two members suggested 50 basis points increase each in the repo rate and the reverse repo rate”, according to minutes of the technical advisory committee meeting held on April 27, 2011.

Besides, one member was of the view that statutory liquidity ratio (SLR) could be increased by 100 basis points and the repo facility of the Reserve Bank be limited up to 2 per cent of excess SLR securities held by banks, it added.

The committee also noted that there were some signs of investment demand slowing down and that the growth in 2011-12 could be lower than that estimated for 2010-11, a week before the RBI’s annual monetary policy review which pegged GDP at 8 per cent for this fiscal.

The committee also felt that inflation would continue to be at an elevated level in the first half of 2011-12, before moderating.

In particular, it expressed concerns over rising global commodity prices, especially crude, and felt that elevated level of global commodity prices was a major risk to both global growth and global inflation.

“Going forward, inflation was a major risk to growth”, it added.

Headline inflation in April was 8.66 per cent, whereas food inflation was 8.55 per cent for the week ended May 14, much above the central bank’s comfort level.

In a bid to tame inflation, the Reserve Bank hiked repo (lending) and reverse repo (borrowing) rates by 50 basis points in the annual policy.

The steep hike in policy rates clearly demonstrated the fact that inflation management was RBI’s top-most priority in the trade-off between growth and price rise.

The central bank has hiked key policy rates nine times since March, 2010.

Source: Financial Express