RBI accords top priority to inflation management

“Banks have responded to this calibrated tightening by raising their deposit and lending rates, suggesting strong monetary policy transmission,” RBI Governor D. Subbarao said here, while announcing the third quarter review of Monetary Policy for 2010-11. With the current increase in interest rates, housing as well as other loans will be costlier for the customers In addition to changes in the policy rates, the RBI extended the additional liquidity support to banks under the liquidity adjustment facility (LAF) to the extent of up to one per cent and a daily second LAF up to April 8 to manage the current liquidity situation. “Inflation is clearly the dominant concern,” said Dr. Subbarao. “Even as the rate itself remains unacceptably high, the reversal in the direction of inflation is striking,” he added. He was mentioning on the moderation in headline inflation which was observed between August and November 2010 and its reversal when WPI inflation (year-on-year) moved up from 7.4 per cent in November to 8.4 per cent in December 2010, due mainly to sharp increase in the prices of vegetables, mineral oils and minerals. While the RBI retained the GDP growth forecast at 8.5 per cent with upward bias, it raised the March inflation forecast to 7 per cent compared to its earlier forecast of 5.5 per cent. Turning to the domestic macroeconomic situation, Dr. Subbarao said the 8.9 per cent GDP growth in the first half of 2010-11 suggested that the economy was operating close to its trend growth rate, powered mainly by domestic factors. “The kharif harvest has been good and Rabi prospects look promising.'' Dr. Subbarao said that tight liquidity conditions persisted throughout the third quarter of 2010-11. The RBI would endeavour to provide liquidity to meet the productive credit requirements of a growing economy, it was important that credit growth moderated to conform broadly to the indicative projection. This would prevent any further build-up of demand side pressures. “The RBI will constantly monitor the credit growth and, if necessary, engage with banks which show an abnormal incremental credit-deposit ratio,” it added. The RBI said the policy decisions would result in containing the spill-over from rise in food and fuel prices to generalised inflation; rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increases; be moderate enough not to disrupt growth; and continue to provide comfort to banks in their liquidity management operations. Giving some guidance, the RBI Governor said current growth and inflation trends clearly warranted that “we persist with the anti-inflationary monetary stance.” Looking beyond 2010-11, the RBI expects the domestic growth momentum to stabilise. Inflation is expected to moderate from the first quarter of 2011-12, but several upside risks are already visible. “The monetary stance will be determined by how these factors impact the overall inflationary scenario,” the RBI said.