RBI `desperate' to rein in inflation surge

The Reserve Bank of India is "desperate" to control inflation, said its Governor, Dr D. Subbarao, on Monday. Pointing out that a lot of other countries were still flirting with deflation while India is having a surge in inflation, Dr Subbarao said- :"When I meet other central bank governors, they tell me `why don't you give us a bit of your inflation.' That's how desperately they want some inflation and how desperate we are to control inflation."

The Governor's expression of concern on the rising inflation, coming as it does in the run-p to the third quarter review of the monetary policy scheduled for January 25, indicates that the central bank could raise key shortterm interest rates by at least 25 basis points to head-off the rising tide of inflation, say analysts.

In December, the Wholesale Price Index (WPI) based inflation surged to 8.43 per cent from 7.48 per cent in the previous month, mainly driven by the runaway increase in food prices. In its midquarter review of the monetary policy last month, the RBI said that the risk to its projection of 5.5 per cent inflation by March 2011 is on the upside. Speaking at a function at the Indira Gandhi Institute of Development Research, the Governor said the challenge for the RBI was to calibrate monetary policy by taking into account the demands of inflation management and the demands of supportive recovery.

INDUSTRIAL GROWTH DIPS

The dilemma facing the central bank in calibrating monetary policy is borne out by the fact that even as the WPI inflation is much above its comfort level of 5.5 per cent, industrial growth plummeted to an 18-month low of 2.7 per cent in November (against 11.3 per cent for the same month of last fiscal).  Any further monetary tightening measure aimed at inflation control now runs the risk of derailing growth.

STRUCTURAL FACTORS

Though food inflation, based on the annual WPI, eased marginally to 16.91 per cent in the week ended January 1 (as against the previous week's annual rise of 18.32 per cent), the pace of decline has been slower than expected largely due to structural factors. The RBI, in its mid-quarter review, had warned that there is a risk that rising international commodity prices will spill over into domestic inflation. Going forward, rising domestic input costs for the manufacturing sector combined with aggregate demand pressures could weigh on domestic inflation.