India Inc warns on RBI's knee-jerk reaction

By Press Trust of India

The government's top economic managers on Monday dropped strong hints that the Reserve Bank may raise key policy rates to check spiraling inflation, even as the India Inc said the central bank must desist from any knee-jerk moves.

The RBI-is slated to announce its quarterly review of the annual monetary policy on July 27-may effect a 0.25% hike each in its repo and reverse repo rates overnight lending and borrowing rates) well before the policy, experts said.

According to Bank of Baroda chief economist Rupa Rege Nitsure, "Inflation is not coming down structurally and demand for foodgrain is growing substantially. I feel that RBI will have to raise rates by 25 bps even before the policy."

There are expectations that the RBI-in the face of tight liquidity conditions owing to 3G auction and advance tax outgo-may resort to hiking only the reverse repo rates and may leave the repo unchanged until cash flows ease in the system. "Yes, we do see possibilities (of pre-policy rate hike). Inflation being where it is, there is a chance of rate hike before the policy." Ashutosh Datar, an economist with IIFL, said.

Tight liquidity conditions have already pushed up the short-term rates while on the other side, banks have also indicated that lending rates in the system will move northward on another round of rate hike from the RBI.

Meanwhile, leading business chambers, who are divided over their outlook for inflation, however, want the Reserve Bank to maintain adequate liquidity to oil growth.

Ficci secretary-general Amit Mitra said, "this is possibly the worst phase of inflation...It is the lean season as far as agricultural supplies are concerned. Once the new crop comes into the market, we can expect inflation in primary articles to come down."

However, Assocham secretary DS Rawat said the common man will face further hardships. "In the first half of the year, inflation will surely go up further due to rising input costs. We will not be surprised, if it increases to 13-14%," he said.

Driven by spiralling prices of essential items, the inflation, measured by the wholesale price index surged to 10.16% in May, the highest in the past 19 months.

Mitra, a well-known economist, noticed a disturbing trend of the spiral in the manufacturing sector as well. "Another emerging source of worry is the build-up of inflation in certain segments of the manufacturing sector," he said, adding the central bank should not use policy tools to cool off demand as he feels the problem lies with the supply side.