RBI expected to maintain tough stand on inflation in mid-term monetary policy review

The mid-term monetary policy review is scheduled for next week, and talk of another interest rate hike is in the air. The economy is at a critical juncture with respect to a balance between inflation, industrial growth and the monetary policy tightening. The Reserve Bank of India (RBI) has already tightened the monetary policy several times since the last one and half years.  The interest rates have gone up to a level where they are threatening to impact industrial growth. Although the inflation rate has shown some signs of coming down, it is still ruling quite high and is yet to come under complete control. Due to several domestic as well as global factors, more action from the policymakers is needed to bring the inflation rate down further. These are some major factors that would be under consideration during the forthcoming monetary policy review: 

The headline inflation based on the Wholesale Price Index (WPI) data and also the inflation rate based on food articles has come down in the recent weeks. However, it is still above eight percent which is much higher than the comfortable limits of 5-5 .5 percent.  There are several domestic as well as global factors fuelling the inflation rate. On the domestic front, the demand is quite robust and as a result the price rise has spread to broader items. This is fuelling the headline inflation. On the other hand, the soft monetary policies and other ongoing issues in the global markets is constantly pushing prices of international commodities up. This is another significant factor contributing to the high inflation rate here. A high inflation rate will prompt the RBI to maintain a tough stance.  The monsoon is a significant factor that influences the economy directly and indirectly as a large portion of the population depends on agriculture-based income. The Met Department has predicted a normal monsoon this year and its progress has been good. A good monsoon has the potential to stimulate economic activity and also check food prices due to good crop yields.  Recent data shows the GDP growth has started coming down a bit due to the tight monetary policy regime followed by the RBI in the recent past. Analysts feel a slower economic growth rate is on the cards in the short term, provided the RBI can control the inflation rate through a tight monetary policy.

ET