RBI's tough choice: High inflation or high growth?

Weekly inflation data released on Thursday showed a slight decline with primary article inflation easing to 10.6 per cent and food article inflation easing to 9.32 per cent. However on a week on week basis, inflation continues to rise and monthly inflation due out on Friday is also expected to be close to 9.7 per cent. In light of persistent inflationary pressures, the RBI governor on Thursday indicated that despite the deceleration in growth, interest rate hikes can’t be ruled out. The key question that the common man and even the RBI governor may have been thinking about is when will inflation come down and when will the burden of high interest rates start to ease. Mr Subbarao on Thursday again acknowledged that despite 12 successive rate hikes inflation remains above the RBI's comfort zone. But he added that the RBI is sensitive to the impact high interest rates are having on growth. "We are sensitive to growth but inflation remains above the RBI's comfort levels," he said. What's complicating matters for the RBI is the weakness in the India rupee. A weaker rupee makes imported goods specially imported more expensive adding to inflation pressures. The RBI estimates that the rupee weakness has led to an effect increase of 3 per cent in the cost of oil for India – a fact that will add to inflation pressures in the economy. High inflation, high interest rates and a slowing economy are also creating pressures for the banking sector with fears of a buildup in bad assets. While NPAs particularly in PSU banks are starting to rise, the RBI seems comfortable that there are no systemic risks yet. Nevertheless, the RBI says it will conduct a fresh round of stress tests for banks before the end of the year. "We are sensitive to growth but inflation remains above the RBI's comfort levels," the RBI Governor said. As the RBI team heads back to Mumbai the focus shifts to the mid quarter review of credit policy due on October 25. With inflation remaining high, economy slowing down and banks feeling the pressure, the decision on whether to hike rates or not will be tougher than ever before.

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