Inflation to be high till fiscal consolidation is complete: Experts

September 17th, 2012 - 11:23 pm ICT by IANS  

Chennai, Sep 17 (IANS) The Reserve Bank of India (RBI) has decided to wait till the effects of current fiscal consolidation is complete before tweaking the policy rates, a top banker said here Monday.

Reacting to the RBI’s mid-quarter monetary review, M. Narendra, Indian Overseas Bank chairman and managing director, said what role monetary policy should play in achieving fiscal stability is now globally debated in the aftermath of eurozone crisis.

“The consensus seems to be for a form of ‘monetary dominance’ whereby central banks pursue inflation stabilisation irrespective of fiscal policy moves,” Narendra said in a statement.

According to him, it is not surprising that the RBI, which is emerging as a role model for monetary stability, has decided to wait and watch till, perhaps, the second quarter monetary policy review in October for any further cut in policy rates.

It had already frontloaded a hefty 50 basis points (bps) cut in April in anticipation of fiscal consolidation.

Narendra said the inflation may go up further given the ongoing fiscal consolidation before it would come down in a sustainable manner.

Referring to the 25 basis point cut in the cash reserve ratio (CRR) announced by the RBI, Narendra said the objective of this move may be two-fold.

The first is to enable banks to meet the expected surge in credit demand following the recent reform measures - allowing foreign direct insvestment (FDI) in multi-brand retail and aviation - to reignite the growth.

“Secondly, the release of additional funds when the liquidity is already comfortable may enable banks to effect selective cuts in rates, particularly for interest sensitive sectors,” Narendra said.

According to Dinesh Thakkar, chairman and managing director of Angel Broking, the CRR reduction is likely to further the positive market sentiment fuelled by the government’s reform measures.

However, he said the headline inflation in the economy remains elevated at 7.5 percent and upside risks to inflation continue to persist.

“Going ahead, I believe that inflationary pressures are likely to be intensified due to the hike in diesel and LPG (liquefied petroleum gas) prices, increase in global liquidity flows and high commodity prices,” Thakkar said.

“The recent measures by the government towards fiscal consolidation are expected to uplift market sentiments and revive investment climate in the economy. However, as far as the monetary policy stance is concerned, I continue to believe it will be focused on inflation management in the near-term,” he added.

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