In the latest revision of the policy for the year, the RBI is fully focused on inflation
The Reserve Bank of India has just published its review of monetary policy in mid-quarter. A study of the quarterly is a recent innovation of the central bank has been driven by the need to communicate more often with the markets in a structured way. The total number of policy statements is now eight – the annual policy statement, half-yearly, quarterly, two-and four mid-term exams – in a year.
Not long ago there were only two policy statements – the annual policy statement and a six-monthly review. The interface of the central bank was expanded to four with two quarterly reviews added to the policy statement and review every six months.
Has more frequent revisions altered the basic structure of the exams? Obviously, with more opportunities to communicate the RBI has less to say on each occasion. The annual return is bulkier than the other, covering issues of substance in addition to the central monetary issues.
Is the forum RBI to announce its annual objectives – in relation to inflation and growth, for example. Along with the six-month review and the other two quarterly statements, the annual policy statement was first announced by RBI Governor at a meeting of bankers in Mumbai. The mid-quarter statements are in the nature of press statements.
The last mid-term exam on March 17 is the last of the eight states for this fiscal year. Coming from the EU budget and the statement of policy next year the annual (2011-12), the review probably has its own meaning. In a move widely anticipated, the RBI raised interest rates in the short term repo and reverse repo rate, by 0.25 percentage points each. The new repository and reverse repo rates are 6.75 percent and 5.75 percent respectively. The total number of increases in policy interest rates, including the last, is eight. Among the central banks of major economies, the RBI has been at the forefront of moves to strengthen monetary policy.
The big worry, of course, is inflation. In fact, right through the years, the RBI focused on inflation. In January, it seemed that the RBI was prepared for framing its monetary policy given the totality of the circumstances and not just inflation. However, shortly thereafter, inflation has re-emerged as a major concern.
After a slight moderation in January, inflation wholesale price index based on a turnaround in February. There has been a sharp increase in non-food inflation, which has more than offset the fall in food prices from January. However, even among food items, prices of milk, fish, eggs and meat have remained high suggesting the structural demand and supply imbalances. Fuel prices remain high and the prognosis is not good, even in the medium term.
Even more disturbing is the fact that non-food inflation of manufactured goods, an indicator of demand pressures, rose sharply from 4.8 percent in January to 6.1 percent in February, well above its medium-term trend. Inflation has, therefore, becoming more widespread. You can not supply-side factors to blame. Rising food prices are not made is the main reason behind his move RBI walk WPI inflation target at 8 percent to 7 percent in March.
The latest budget plans to slash the fiscal deficit by compressing the cost estimates and forecast revenue. This should help the stance of monetary policy to fight inflation. However, the budget may have underestimated some expenditure items, such as subsidies. It may be more optimistic about revenue growth.
The RBI had expressed its concern at the increasing current account deficit (CAD), is less concerned now. The CAD is expected to be at a lower level than expected 2.5 percent of GDP. However, the concern for the financing of CAD followed. Measures are needed to attract these capital flows as foreign direct investment, which are more stable. The dependence of short-term volatility in portfolio flows, should be reduced.
The CSO estimate of 8.6 percent growth for this year is in line with projections RBIs. Agricultural production is likely to remain at a high level. The Index of Industrial Production (IIP) remains unstable, while other indicators such as the collection of indirect taxes, growth of exports of goods and the expansion of bank credit suggests that the pace of growth continues. However, there is continuing uncertainty in the prices of energy and raw materials. This can vitiate the investment climate and jeopardize the current growth path.
The world economy presents a mixed picture. Growth in emerging economies remains strong, while in the U.S. and the euro area is gaining momentum. However, unrest in the Arab world and the consequent uncertainty about oil supplies has cast doubt on the recovery process. As the prices of commodities and food remain high, there are fears about inflation returning to these economies. Inflation, in fact, increased significantly in a number of advanced economies, especially in the eurozone and the UK
Finally, it may be too early to assess the macroeconomic consequences of natural disasters in Japan. According to RBI, the cost of reconstruction may give a boost to the economy. However, if the thermal energy is going to replace nuclear power in Japan, there will be upward pressure on world oil prices.