The revised policy rates. repo at 8.25 per cent, reverse repo at 7.25 and marginal standing facility (MSF) at 9.25 per cent come into force with immediate effect. This is the 12th time that RBI has hiked rates over the last 18 months of its battle against inflation through demand management.

Unaided by any tangible efforts by Government on the supply side, the monetary policy effectiveness has suffered to some extent. The latest rise, according to RBI, would reinforce the impact of past policy actions to contain inflation and anchor inflationary expectations

RBI’s assessment of the macro-economic scene is not exactly on par with that of Government whose unstated preferred approach is for a pause, though the Finance Minister Mr Pranab Mukherjee himself conceded that WPI at 9.78 per cent in August was “perilously” close to double digit while the non-food inflation remained high at 7.79 per cent.

However, given the apparent industrial slowdown and the worsening global economic situation and commodity price inflation, he favoured Government and RBI “collectively” tackling the problem at a “time of stress” everywhere. His Chief Economic Adviser Dr Kaushik Basu was more forthright in suggesting that RBI should “balance between control of inflation and dampening growth”.

In its mid-quarterly statement on September 16, RBI says despite many indicators pointing to moderating growth, both headline and non-food manufactured products inflation are “at uncomfortably high levels”. Crude oil prices remain high and food price inflation persists notwithstanding a normal monsoon. However, RBI expects inflationary pressures to ease towards the later part of 2011-12. Stabilisation of energy prices and moderating domestic demand should facilitate this process. But in the current scenario, RBI sees the “likelihood of inflation remaining high for the next few months” and thus “rising inflationary expectations remain a key risk”

Meanwhile, the raising of petrol price by the oil marketing companies by Rs. 3.14 per litre would have a direct impact of 7 basis points to WPI inflation, according to RBI, in addition to indirect impact with a lag. The new combined (rural and urban) consumer price index (base: 2010=100) rose to 110.4 in July from 108.8 in June. Other consumer price indices registered inflation rates in the range of 8.4 to 9.0 per cent in July.

On the whole, RBI says, inflation at present remains “high, generalised and much above” its comfort zone. The rise in non-food manufactured products inflation again in August suggests continuing demand pressures. Apart from global crude oil prices at elevated levels despite weakening of global recovery, domestically, RBI says, there is still an element of suppressed inflation, as pass-through to domestic prices remains incomplete.

Current administered electricity prices are yet to reflect increase in input prices though some states have initiated increases. Food inflation is at near-double digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand-supply imbalances and cannot be dismissed as a temporary phenomenon”.

It is here that Government’s failure on the food prices front for over two years shows itself up, firstly by not taking firm measures with available supplies to control market forces, and secondly, by not initiating credible programmes on crop productivity and diversification, though the latter may not yield quick results. Inaction has been coupled with wishful thinking of prices falling on their own. In effect, inflation has been left outside the pale of macro-economic management by a Government obsessed with higher growth.

Whatever the Chief Economic Adviser may feel about the impact of monetary actions so far, RBI says it has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond its own comfort zone. “As monetary policy operates with a lag, the cumulative impact of policy actions should now be increasingly felt in further moderation in demand and reversal of the inflation trajectory towards the later part of 2011-12.”

Any “premature change” in the policy stance, RBI asserts, could” harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance”. Going forward, the central bank says its stance would be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments.

The Asian Development Bank Outlook Update on September 14 said, with particular reference to India, that policy-makers in the region “cannot relax in the fight against inflation, even if global growth concerns overtake price pressures as dominant economic risk”. It noted that overall inflation stayed high at 9.2% in July, and nonfood manufacturing inflation was 7.5%. Inflation pressures are, however, ”likely to fade” in the second half of the fiscal year as commodity prices are expected to stabilize and as the lagged impact of higher lending rates on demand comes into play.

Still, ADB noted, further monetary tightening may be necessary if the RBI is to achieve its goal of taking inflation down to 7% by end-FY2011. The Update has projected a lower growth of GDP at 7.9 per cent in 2011, as against its earlier estimate of 8.2 per cent and growth for 2012 is also revised down from 8.8 per cent to 8.3 per cent “due to a longer monetary tightening cycle and higher policy rate hikes, than expected earlier”. ADB has projected inflation at 8.5 per cent, which would decline to 6 per cent in 2012.

While RBI has not reverted to its growth estimate in fiscal 2011-12 which it had moderated earlier to “around 8 per cent”, it is likely to make revised growth and other projections in its mid-year review (second quarter) on October 25, In the present statement, it noted India’s exports have performed extremely well in the recent period though trend is unlikely to be sustained in the face of weakening global demand. This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that 'risks to the growth projection for 2011-12 made in the July Review are on the downside”. (IPA Service)