RBI says high inflation may continue, rate hike likely

July 25th, 2011 - 7:33 pm ICT by IANS  

Mumbai, July 25 (IANS) The Reserve Bank of India (RBI) Monday said the upward pressures on food and overall inflation may remain in the short-term, signalling another rate hike when it takes up the quarterly review of the monetary policy July 26.

It also said that growth could remain around the eight percent-mark, according to the projection given in its annual monetary policy for the current fiscal.

If the RBI hikes rates again, this would be the 11th rate hike since January 2010 and could result in commercial banks passing on the increase to its customers — making loans to individuals as well as companies that much costlier.

“Food inflation has declined. However, near-normal monsoon may not ease pressure on food inflation further due to increases in wage costs and support prices,” the RBI said in the macroeconomic and monetary developments: first quarter review 2011-12.

“Near-term upside risks to inflation remain significant. Price pressures are expected to persist through Q2 as well and then moderate towards the later part of 2011-12. These trends necessitate structural reforms to enhance supply response, while the anti-inflationary bias of monetary policy anchors inflation expectations,” the central bank added.

Though food inflation came down to an over two-year low for the week ended July 9, overall inflation is still hovering close to double digits.

In its last review, the RBI had hiked short-term lending rates or repo by 25 basis points in a bid to curb inflation and indicated that more such increases were in the offing.

Analysts expect a similar hike this time around as well.

According to a survey conducted among 13 economists and financial analysts by the Federation of Indian Chambers of Commerce and Industry (FICCI), the RBI is expected to hike the repo rate by 25 basis points.

The persistent rate hikes has hit industrial output and even the RBI acknowledged that factory production had slowed. It also has raised the sceptre that the country’s gross domestic product would grow at a slower rate this year.

“On current reckoning, growth is likely to stay around trend growth of around 8 percent. However, downside risks have increased. Overall some moderation in growth is expected in 2011-12. Various expectation surveys also indicate the same,” the RBI said.

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