The central bank’s report indicates that a hike in interest rate is likely

The Reserve Bank of India (RBI) has said that the wholesale inflation (WPI) is ruling above its comfort level and may remain around the current level during the second half of 2013-14, indicating that the central bank is likely to hike the rates when it reviews its monetary policy on Tuesday.

“Concerns about inflation emanate not just from high and persistent consumer price inflation but also from rising WPI inflation,” the RBI said in its Macro-Economic and Monetary Developments Second Quarter Review 2013-14, released on Monday.

This document serves as a backdrop to the Second Quarter Review of Monetary of Policy 2013-14, which will be announced on Tuesday. At the present juncture, said RBI, “monetary policy faces an unenviable task of anchoring inflation expectations, even while growth remains tepid…….growth concerns are addressed in an environment of stable prices without endangering macroeconomic stability.”

Despite the recent exchange rate stability, the RBI said that the external environment for the country was still fragile and buffers needed to be rebuilt. “There is little scope for complacency at this stage, even though the rupee has gained strength,” it added.

It said macro-economic risks still existed with upward pressure on inflation and the possibility of fiscal slippage, “thus posing new challenges.”

For supporting growth, the RBI felt, complementary actions aimed at productivity-enhancing structural reforms, addressing supply constraints and ensuring quick project implementation were needed.

However, it said modest improvement in growth was expected in the second half of 2013-14. But a fuller recovery was likely to start taking shape towards the end of the fiscal year on the back of current steps to clear impediments that were stalling projects, it pointed out.

It also said that external sector risks had reduced as current account deficit (CAD) was likely to moderate . “The trade balance has responded to the policy measures taken.”

The RBI also said that the payment crisis facing the National Spot Exchange Ltd crisis exposed regulatory gaps prevailing in systemic institutions.

“The crisis has raised the issue of inter-connectedness of financial institutions. Many brokerage firms are active in multiple segments, including equity, commodity and forex. A loss in one segment of their operations can have a cascading effect on other segments, in turn, propagating contagion effects throughout the market,” the RBI said.

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