The monetary unwinding that started in October 2009 should continue till inflation expectations are firmly anchored and inflation is brought down, “given the risks to inclusive growth from high inflation,” the Reserve Bank of India said on Monday on the eve of its first quarter review of Monetary Policy 2010-11 on Tuesday.
The markets are expecting a hike in interest rates by the central bank on Tuesday.
“With concerns about the recovery receding, increasing risks of generalised inflation indicate that monetary policy has to continue the calibrated normalisation process,” RBI said in its document Macro economic and monetary developments: first quarter review 2010-11 which serves as a background to the first quarter review of Monetary Policy 2010-11 to be announced on July 27.
Wholesale price index (WPI) inflation has been in double digits since February this year and has also become increasingly generalised in every successive month.
Non-food manufacturing inflation accelerated from near zero in November 2009 to 7.3 per cent in June 2010, reflecting the impact of rising input costs, recovering private demand and associated return of pricing power.
The RBI further stated that the GDP growth in 2010-11 could be expected to be higher than the 8 per cent projected in the April 2010 monetary policy statement.
“Going by the progress of the monsoon so far, agricultural output is expected to be better than last year. Industrial production continues to exhibit double-digit growth in the current year; notwithstanding some moderation in May 2010, the downside risks to growth are low. Lead indicators for services activities suggest continuation of the growth momentum.”
The Professional Forecasters' Survey conducted by the Reserve Bank in June placed overall (median) GDP growth rate for 2010-11 at 8.4 per cent, higher than 8.2 per cent reported in the previous round of the survey.
The surplus liquidity conditions that prevailed all through 2009-10 started moderating in early 2010-11 in response to the calibrated normalisation of monetary policy by the Reserve Bank.
Tight liquidity
In June 2010, however, there was severe tightness in liquidity conditions resulting from a sudden and sharp increase in the government cash balances stemming from significantly higher mobilisation under 3G/BWA spectrum auctions.
While mitigating the liquidity pressure, the Reserve Bank persevered with calibrated monetary tightening keeping in view the higher level of inflation.
