RBI faces tough choice on rates as economy slows
Aggressive monetary tightening by the central bank at its policy meeting could tip the economy into a longer-term downturn. Heard on the Street | Stocks to watch
By Agencies |
MUMBAI: India's central bank must decide on Tuesday whether to ramp up its inflation fight amid warnings that imposing too harsh credit conditions could damage an already slowing economy.
Overly aggressive monetary tightening by central bankers at their policy meeting could tip Asia's third-largest economy into a longer-term downturn after posting scorching average annual growth of nearly nine per cent over the past five years, economists say.
Upward interest "rate moves will have a bigger depressing impact on growth than on inflation," which has been mainly driven by soaring global commodity prices for food and fuel, said HSBC senior economist Robert Prior-Wandesforde.
Overly aggressive monetary tightening by central bankers at their policy meeting could tip Asia's third-largest economy into a longer-term downturn after posting scorching average annual growth of nearly nine per cent over the past five years, economists say.
Upward interest "rate moves will have a bigger depressing impact on growth than on inflation," which has been mainly driven by soaring global commodity prices for food and fuel, said HSBC senior economist Robert Prior-Wandesforde.
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But while India's economic engine has been losing steam, inflation holds centre stage after more than doubling in four months to hit 7.33 per cent last week -- a more than three-year peak and far above the central bank's comfort level of five per cent.
Curbing prices has become the key goal of the left-leaning Congress-led government, which fears a voter backlash with general elections due in a year.
Economists are unanimous the Reserve Bank of India (RBI) will keep up its tough anti-inflation talk but are split on whether it will raise so-called "signal interest rates."
"We think the RBI will continue its tightening stance in the near term, and in particular, hike the repo rate by 25 basis points on Tuesday," said Goldman Sachs economist Tushar Poddar.
"Demand pressures are still rampant due to growth running above potential for the past few years," he said.
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The repo rate is the bank's main inflation-fighting tool through which it lends cash to banks and influences commercial borrowing costs. It is now at a six-year high of 7.75 per cent. Other economists expected the bank to take a wait-and-see stance after forecasts last week of record grain harvests.
"There have been some positive domestic developments," said Dharma Kriti Joshi, principal economist at Crisil credit rating agency.
"If the bank is extra cautious, it could raise rates but with the adverse global scenario and the tightening already taken, economic growth is already on a downward trajectory and so demand pressure is easing up on its own," he said.
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"My view is they will maintain a very hawkish stance but stand pat on rates," he said. JP Morgan Asia economist Rajeev Malik also said the bank was "likely to hold fire" on raising rates but sound "hawkish."
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Last week's inflation figure came days after the RBI stepped up its inflation battle by reducing cash available for commercial loans in a bid to cool demand. It hiked by 50 basis points the funds commercial banks must park in its coffers -- the so-called cash reserve ratio -- to a seven-year high of 8.0 per cent.
The bank has been tightening aggressively since late 2004 to keep a lid on prices.
Now, with the global downturn, some economists say growth could fall as low as 7.0 per cent in this fiscal year to March 2009 from around 8.7 per cent last year and 9.6 per cent the previous year -- still robust but too low to make a big dent in India's crushing poverty.
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