Inflation needs to come down for rate hikes to ease: RBI

MUMBAI - A day ahead of its monetary policy review, India’s central bank Monday said inflation needs to come down from current levels for interest rate hikes to ease off.

Inflation has been the driving force behind the tweaking of interest rates, something the central bank has done five times this year.

“The inflation pressures persist and further moderation would be necessary for easing the concerns for the conduct of monetary policy,” said the Reserve Bank of India in a document which serves as the prelude to the periodical review of the monetary policy.

RBI Governor D. Subbarao will conduct the second quarterly review Tuesday at 11.30 a.m. Analysts expect key interest rates to be increased by 25 basis points.

The overall annual inflation rate has fallen in recent months, but is still at a high level of 8.62 percent as recorded in September. The 52-week rise in food prices is also in double-digits at 13.75 percent for the week ended Oct 16.

“Different measures of consumer price inflation fell below double digit levels after more than a year, but still remain elevated tracking high food and fuel inflation,” said the RBI in the macroeconomic and monetary developments document.

Subbarao had met Finance Minister Pranab Mukherjee last week. Asked if the meeting was to decide on whether to hike rates, Mukherjee said: “I had a discussion with the RBI governor. He may may take the necessary step.”

The RBI was, however, optimistic about the economy growing at a robust pace this fiscal as the country had received adequate rainfall and industrial production had shown robust growth, though there is “wide volatility around the trend”.

“The current data on indicators of economic performance remain consistent with the 8.5 percent growth projected in the July 2010 monetary policy statement,” said the RBI, which based this outlook on many parameters including a survey done by various professional forecasters.

The RBI was also confident of the continued growth in industrial output as a survey conducted by the central bank showed that companies involved in various industries had shown improvement in the July-September period and expected to continue the trend into the next quarter.

In the previous mid-quarter review Sep 16, the central bank had hiked its short-term borrowing and lending rates by 50 basis points and 25 basis points, respectively, continuing with its tight monetary policy stance since January to tame inflation.

Accordingly, the repurchase rate stood revised to 6 percent from the earlier 5.75 percent, while the reverse repurchase rate was hiked to 5 percent from 4.5 percent in what was the first mid-quarter review of the policy for this fiscal.