Baby steps towards taming inflation

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) July 28, 2010 -- July 27, 2010
Comments on Credit Policy
Hemindra Hazari, Head – Institutional Research ,
Karvy Stock Broking Limited

The announcement came against the backdrop of high inflation and the recent fuel price hikes by the government. The rate hike may induce banks to hike their deposit rates in the short term while lending rates may gradually increase in the future.

Meanwhile, the central bank has raised its GDP growth projection for FY11 to 8.4% (against 8.0% earlier) while it revised up its inflation expectations to 6% from 5.5%.

The RBI’s decision to increase the repo rate by 0.25% is not commensurate with the anxiety devoted to inflation. Although, in the credit policy, the central bank cautions on the high level of inflation, the measures adopted appear quite half-hearted. In our view, the RBI should have increased the repo rate by 50-100 bps if it was concerned about inflation. This would have compelled banks to sharply increase their deposit and lending rates, thus lowering inflation as well as economic activity.

In fact, with the central bank raising GDP growth and inflation forecast for FY11, it is sending out a signal that it does not expect to undertake strong anti-inflationary policies. It, therefore, appears that the RBI is more influenced by the government wanting a soft interest-rate policy, focusing on GDP growth rather than inflation control.

The government’s approach to controlling inflation rests on the likelihood of a normal monsoon and subdued international oil prices. Unfortunately, both these are beyond its control, and, therefore, the RBI has taken the onus to implement some measures towards inflation control.
We believe that the measures proposed in this credit policy will not help to control inflation significantly. However, it demonstrates that the government and the RBI are taking some measures in this regard.

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