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Updated: April 30, 2011 00:11 IST

Subbarao meets Pranab ahead of credit policy

Special Correspondent
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RBI Governor D. Subbarao arrives at North Block for a meeting with Union Finance Minister Pranab Mukherjee in New Delhi on Friday.
PTI RBI Governor D. Subbarao arrives at North Block for a meeting with Union Finance Minister Pranab Mukherjee in New Delhi on Friday.

‘A hawkish stance by way of a higher increase in rates will have a negative impact on manufacturing'

Ahead of the annual credit and monetary policy announcement on May 3, Reserve Bank of India Governor D. Subbarao on Friday held a customary meeting with Finance Minister Pranab Mukherjee to exchange views on the state of the economy and the government's perception of the emerging macro-economic scenario during the course of the current fiscal.

“As a standard practice, I had come to review the macro-economic situation with Finance Minister and senior officers ahead of the policy review,” Dr. Subbarao told the media after his meeting with Mr. Mukherjee. Asked if the ongoing bout of high inflation would impact overall growth, he said: “We will answer these questions on May 3.”

With the prime concern of authorities being the urgent need to rein in inflation without unduly hurting the growth momentum, the general expectation is that the RBI would settle for yet another hike in its short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points each.

In fact, so sanguine are economic analysts and bankers that the stock market has already factored in hikes in the apex bank's key policy rates by that margin.

In its bid to contain the price spiral, the RBI till date has already raised the repo and reverse repo rates eight times since March 2010 to 6.75 per cent and 5.75 per cent, respectively.

On the ground, however, even as these measures have largely failed to douse inflationary expectations, analysts feel that a hawkish stance by way of a higher increase of about 50 basis points would have a negative impact on manufacturing at a time when industrial growth has started showing signs of deceleration. Headline inflation in March, as per the wholesale price index (WPI), surged to 8.98 per cent — way above the comfort zone of 5-6 per cent and much higher than even the RBI's scaled-up projection of 8 per cent for 2010-11. Alongside, factory output, as measured by the Index of Industrial Production (IIP), decelerated to 3.6 per cent in February as compared to a robust expansion of 15.1 per cent posted in the same month last year.

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