RBI hawkish ahead of review despite global gloom

The Reserve Bank of India (RBI) remains bent on fighting domestic inflation despite weakening global conditions, officials with direct knowledge of policymaking said, a week before it is widely expected to raise interest rates once again.

The RBI, which has lifted rates 11 times in 18 months, makes its mid-quarter review on September 16.

Though senior bank officials are hawkish, RBI Governor Duvvuri Subbarao will not make a final decision before the release of August inflation data on September 14, the sources said.

"We still have high food and non-food manufacturing inflation, good credit growth to industry and growth is also quite good according to our view," said an official with direct knowledge of the matter.

"So, domestic factors will continue to be the key driver for policy framing," the official said.

RBI officials have kept up the hawkish talk in recent weeks even as fears mount that western economies are slipping back into recession, although the central bank is widely believed to be nearing the end of its tightening cycle as its earlier actions exact a toll on demand in Asia's third-largest economy.

Also, the Finance Ministry is putting pressure on Subbarao, whose term was recently extended for two years, not to continue tightening for much longer. Finance Minister Pranab Mukherjee this week was quoted as saying that he hoped the RBI will not raise rates further.

Senior Finance Ministry officials said continued steady rate increases might not have the desired effect of cooling inflation without overly disrupting growth.

"Yes, inflation still remains the big concern but I see that peaking off at the end of the year, but growth will also come into sharp focus," one of the officials said.

INFLATION FIRST

Last week's jump in food inflation, high non-food manufacturing inflation, the knock-on impact of a June fuel price increase and resilient credit growth all point to a need for continued vigilance, several RBI officials said, declining to be identified given the sensitivity of the matter.

Headline inflation for July was 9.22%, much above the RBI's end-March 2012 projection of 7%. India's food price index rose 10.05% in the year to August 20, its highest in nearly six months, while the fuel price index was up 12.55%.

"Inflation has not yet peaked. To some extent the global developments will have some impact on the external sector. We are cautiously hawkish," the RBI official said.

While advanced economies are struggling to ward off stagnation, central banks in emerging markets are confronted with high inflation and cooling growth.

Brazil recently surprised with a rate cut despite still-high inflation, and market speculation that China may ease lending conditions for some small and medium sized companies has added to expectations the tightening cycle will soon end in emerging markets.

"Brazil cut rates after raising them sharply, so they had room to cut. We are anyway behind the curve," said another senior RBI official.

"So where is the room to even pause unless the global recovery concerns bring down commodity prices drastically?" the official said.

Gross domestic product growth in India slipped to 7.7% in the three months through June, and with high inflation persisting, many economists are scaling down their growth forecasts.

The RBI has raised its key rate by a total of 325 basis points to 8% since March 2010, including a sharper-than-expected 50 basis point hike in July, meaning its next move is not easily predicted.

The minutes of the July meeting of the RBI's advisory panel on monetary policy showed that the majority favoured a pause or a quarter point increase.

Source: Business Standard