RBI hints at interest rate hike to check inflation

RBI-sponsored forecasters scale down growth projection to 4.8% for the current fiscal from 5.7% estimated earlier 

“With the normalisation of exceptional monetary measures under way, incremental calibration will be shaped by changes in the growth-inflation balance, keeping macroeconomic stability in consideration” — Raghuram Rajan, Governor, RBI

RBI hints at interest rate hike to check inflation

Mumbai : Reserve Bank Governor Raghuram Rajan on Monday hinted at increasing the key rate at the second quarter monetary policy review today, citing urgency to anchor inflationary expectations.

“With the normalisation of exceptional monetary measures under way, incremental calibration will be shaped by changes in the growth-inflation balance, keeping macroeconomic stability in consideration,” he said in the Macroeconomic and Monetary Developments report on the eve of the policy announcement. However, the report adds, “Macroeconomic risks still exist with some upward pressure on inflation and the possibility of fiscal slippage, thus posing new challenges.”
Acknowledging that growth has dipped below potential, Rajan said a revival will require “complementary monetary, fiscal and regulatory policies,” apart from increasing fuel prices to contain demand, productivity enhancement and quick project implementation.
The report said “we can expect a modest recovery in growth in the second half on good monsoon, and an uptick in exports and industrial production.”
Rajan, who took over as head of the central bank last month, warned that there is a risk of fiscal slippage due to the widening revenue deficit and high capital expenditure by the government in the first half, which has exhausted over 74.6% of the fiscal deficit target already.
In his first policy review announced just a fortnight after he took charge September 4, Rajan had increased the repo rate by 0.25% to 7.5%, terming the inflationary situation “worrisome”.
Most analysts feel Rajan would opt for at least 0.25% hike in repo rate again Tuesday as fighting inflation remained his priority.
Rajan indicated that special measures taken by the RBI to contain exchange rate volatility would be gradually reversed.
The RBI has already reduced the marginal standing facility rate, at which it lends emergency funds to banks, by 1.25% in two tranches since September 20 to 9%.
Currently, the repo rate, the rate banks pay when they borrow money from the central bank to meet their short-term fund requirements, stands at 7.5% per annum. Reverse repo rate, the interest rate that the RBI pays to commercial banks when they keep their surplus short-term funds with the central bank, is at 6.50%.

GDP forecast at 4.8%
Meanwhile, Reserve Bank-sponsored professional forecasters have scaled down India’s growth projection to 4.8% for the current fiscal from 5.7% estimated earlier. In its Macroeconomic and Monetary Developments Second Quarter Review 2013-14, the central bank said the survey by professional forecasters outside the Reserve Bank indicated a slowdown in growth.
Various external agencies like the IMF and the World Bank have lowered their growth projections for India. Their estimates range between 4.3-5.9%.
The Reserve Bank, however, said modest improvement in growth is possible in the second half of 2013-14.
Growth has slackened to a 17-quarter low of 4.4% during first quarter of 2013-14. On current reckoning, growth in 2013-14 is likely to stay at about the level of last year. “After a slower H1, a modest recovery is likely in H2 of 2013-14. This is expected to come from a rebound in agricultural growth backed by a better than normal south-west monsoon and a pick-up in exports,” RBI said.

Fuel price hike
The Reserve Bank of India also reiterated that the government needs to further hike the price of subsidised fuels in order to dampen demandand reduce the fiscal and external deficits.
“Given the still large under-recoveries, there is need for further upwardadjustment in fuel prices which would also dampen demand and restrain thetwin deficits-fiscal and external,” the RBI said.
State-owned oil marketing companies are currently incurring daily revenueloss of Rs.4.42 bn on sale of subsidised fuels. Indian Oil Corp Ltd, Hindustan Petroleum Corp Ltd, and Bharat PetroleumCorp Ltd are estimated to suffer a revenue loss of Rs.10.24 per ltr onsale of diesel.
The revenue loss on sale of kerosene was estimated to be Rs.38.32 a ltr in October, while the same for subsidised cooking gas isestimated to be Rs.532.86 per 14.2-kg cylinder.

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