Monday, July 11, 2011

Indian inflation - July 11, 2011

Just about a fortnight before the first quarterly review of the monetary policy statement by the Reserve Bank of India, deputy governor K C Chakrabarty has made a statement which reflects the central bank’s state of mind on interest rate scenario.


When asked whether interest rate had peaked, on the sidelines of FinMin Pranab Mukherjee’s meeting with the public sector bank chiefs in the capital on Friday, Chakrabarty initially feigned ignorance. “How would I know?... If inflation has peaked, interest rates, too, would. And if it hasn't, then interest rate hasn't peaked,” he said.

RBI is slated to announce the first quarterly review of the monetary policy on July 26th. This will be done in a meeting with the chief executives of major banks. In its mid-quarterly review in June, the RBI raised key policy rates by 25 bps in its effort to ‘tame’ inflation. It had raised the short-term lending (repo) rate by 25 bps to 7.50% and the short-term borrowing (reverse repo) rate was moved up by a similar margin to 6.50%. 

“Going forward, notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high. Against this backdrop, the monetary policy stance remains firmly anti-inflationary. Recognising that in the current circumstances, some short-run deceleration in growth may be unavoidable to bring inflation under control,” the RBI had said in its June review. Inflation rose to 9.06% in May after dropping to 8.66% in April. Prior to this, it had been over 9.0% for the previous 4 months. The data of June will be released on Tuesday and will factor the impact of fuel price rise. The second round of impact will be evident later.

Published: 11 July, 2011
written by: Bill Hubard , Chief Economist at Markets.com