NEW DELHI -- India's unprecedented monetary tightening since early last year has run its full course as any further rate increases will have little impact on cooling inflation and may instead hurt economic growth, a senior adviser to the central bank said. "I thought it [rate increases] should have ended last time [July policy] itself, but they [central bank] pushed it forward," Sudipto Mundle, a member of the Reserve Bank of India's technical advisory committee on monetary policy, said late Thursday. The panel is headed by the RBI governor and includes some RBI board members, Deputy Governors and external experts. Mr. Mundle said an overwhelming majority of members favored the central bank to hold its policy rate steady at the October meeting. "There was just one member who favored a 25 basis-point increase while five wanted no change," he said. The RBI, however, raised the rate by 0.25 percentage point, its 13th increase since March 2010. Still, the RBI's quickest-ever pace of tightening hasn't tamed intolerably high inflation, which has remained above 9% for 10 months to September. Mr. Mundle said inflation was being driven by high global commodity prices and local supply issues, and raising the policy rate will be ineffective in controlling price pressures. "You can't say I have got a cold and, therefore, I would bandage my foot. You have to match the medicine to the disease." Mr. Mundle said the RBI's cautious "baby steps" approach hasn't been very effective and the central bank should have rather raised rates in much more chunkier moves, which would have helped "shock" the market and break inflationary expectations. He was referring to the RBI's practice of raising the policy rate by 0.25 percentage point at each go--the central bank stuck to this practice 11 times of its 13 increases. Mr. Mundle said inflation will ease in the January-March quarter as global commodity prices will begin to cool by then, helped by a favorable base. However, it will still overshoot the RBI's March-end projection of 7%, possibly ending the fiscal year at as high as 8%. The recent weakness in the rupee will exacerbate inflationary pressures. The rupee has fallen about 10% against the U.S. dollar since April. While the RBI's aggressive tightening has had little impact on inflation, growth has slipped considerably due to higher borrowing costs that have crimped economic activity. Mr. Mundle expects the economy to grow 7.0%-7.5% this fiscal year, below the RBI's 7.6% forecast.
WSJ
