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  3. RBI may stick to its anti-inflationary stance

RBI may stick to its anti-inflationary stance

17 Sep 2012 Evaluate

After a series of big reforms by the government, the Reserve Bank of India (RBI) is likely to surprise the markets with some easing in policy rates. However, the apex bank is under pressure as the government’s decision to increase the diesel prices and limiting the number of subsidised cooking gas cylinders per household to six per year may plug holes in fiscal deficit but are likely to fuel the inflation, still the hopes are high that they will tinker with rates.

One of the governors of the RBI has said that inflation is likely to rise further due to recent hike in diesel prices, which will have cascading effects on the economy. Wholesale price index (WPI) based inflation rose to 7.55 per cent in August after falling below 7 per cent in July. In the first quarterly monetary review announced on July 31, RBI had raised its inflation outlook to 7 per cent and revised the year’s growth target to 6.5 per cent.

In its recently released Monthly Bulletin for September 2012, RBI has highlighted that exports during Q1 of 2012-13 declined by 1.7% to $75.2 billion as global economic and trade environment remained unsupportive. However, imports too declined by 6.1% to $115.3 billion, reflecting the contraction in imports of gold and silver and a moderate growth in imports of petroleum, oil and lubricants (POL).

There is a group of economist that believe that Reserve Bank of India may hold rates steady, as it wages a protracted battle with inflation and the latest governments measures are likely to address the supply side constraints only for the medium term. On the same time, the hike in diesel price is likely to raise inflation by 60 basis points (bps) in the first round.

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