RBI hints at rate hike, containing inflation main objective

MUMBAI - India’s central bank Monday said that containing inflation was on top of its agenda and hinted at a possible hike in key interest rates when it conducts a periodical monetary policy review on Jan 25.

The move has been largely expected by analysts and economists with food inflation remaining persistently high, although a drop was seen according to the latest data available.

“Since persistent high inflation could endanger the growth objective and also amplify risks to inclusive growth, containing inflation will have to be the predominant objective of the monetary policy in the near-term,” the Reserve Bank of India said in a document that acts as a precursor to a monetary policy review.

According to its overall assessment, “downside risks to growth have receded, upside risks to inflation have increased”.

The Reserve Bank of India (RBI) has already tinkered with interest rates six times this fiscal to control soaring inflation but had left them untouched during its last periodical review Dec 16.

It has been the most aggressive major central bank in Asia this year, hiking key lending and borrowing rates by 150 and 200 basis points respectively.

The repo (the rate at which RBI lends to banks) currently stands at 6.25 percent, while the reverse repo (the rate at which RBI borrows from banks) is 5.25 percent.

The RBI, in the document titled “the Macroeconomic and Monetary Developments in the Third Quarter of 2010-11″ also said that a normal monsoon season had failed to soften food inflation significantly, as was expected, reflecting the impact of growing structural imbalances in certain sectors, particularly non-cereal food items.

India’ annual food inflation based on wholesale prices fell to to 15.52 percent for the week ended Jan 8 but high prices of vegetables continued to pinch people at large.

Overall inflation based on wholesale prices was at 8.43 percent, much higher than the comfort level.

According to economists participating in a survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI), the RBI was likely to hike both repo and reverse repo rate by another 25 basis points.

“This however would increase the cost of capital further slowing down the pace of manufacturing and industrial sector in the country. Monetary policy may not be a very effective tool when dealing with inflation that is largely being driven by supply side factors,” said a statement from FICCI.

Industrial output fell to an 18-month low in November with production growing at a slow 2.7 percent.

The RBI, however, was optimistic about the economy’s growth saying that the robust gross domestic product growth in the first half of the current fiscal suggested that the economy had returned to its earlier high growth path.