Warning that soaring prices could ’dampen’ economic recovery, RBI on Monday said its annual monetary policy tomorrow may focus on containing inflation, a move that may see the apex bank raising key rates.

RBI said, monetary management in the current fiscal will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses.

“While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth,” the Reserve Bank said in its report on Macroeconomic and Monetary Developments, 2009-10.

Growth itself, according to a professional forecaster’s survey commissioned by RBI, is seen at 8.2 per cent this fiscal. In FY’10, the economy is expected to expand by 7.2 per cent.

The central bank said that with the improving growth outlook, monetary and fiscal exit measures have started, but warned that an ill-planned exit from monetary and fiscal stimulus would mar growth.

RBI, which eased its monetary policy stance in the wake of the global financial meltdown in 2008, has already raised its short term lending and borrowing rates (repo and reverse repo) by 25 basis points and asked banks to keep more money with it and in government securities, gold and cash - moves aimed at tempering demand for loans and, in turn, consumer spending.

Expectations are already rife that RBI would further squeeze money supply and make borrowings costlier to cool inflation, which is near the 10 per cent level and is spreading to manufactured items from food products.

RBI itself said, “The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of deficient monsoon on agriculture output and increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalised,” the central bank said in the macro economic review.

This is evident from the acceleration of inflation in non-food manufactured products from (-)0.4 per cent in November, 2009 to 4.7 per cent in March, 2010, RBI said.

RBI further said inflation, as measured by consumer price indices also remained high, though there was some moderation in February, 2010.

“These inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations,” the Reserve Bank said.

Keywords: RBImonetary policy

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