RBI hints at another rate hike to tame inflation

With inflation remaining high, the Reserve Bank Monday indicated that it may go for another round of interest rate hike tomorrow even though the step may impact the economic growth.  "Inflation risk...persists. The policy choices have become more complex. In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics even as transmission of the past actions is still unfolding," RBI said in its review released on the eve of mid-year monetary policy announcement tomorrow.

Though the risk to growth is becoming visible, the challenge of bringing down inflation to an acceptable level on a sustainable basis remains significant, it further said.

On account of various global and domestic factors, the RBI said, "growth in 2011-12 is likely to moderate slightly from that projected earlier".

The RBI had projected the economic growth, or GDP expansion, for the current fiscal at 8 per cent, down from 8.5 per cent in 2010-11.

The Reserve Bank of India (RBI) has raised interest rates by 350 basis points since March, 2010 in its bid to contain inflation, which has remained near double-digit.

The rate of price rise was 9.78 per cent in August, while food inflation was 10.6 per cent for the week ended October 8.

The Reserve Bank said the investment demand is softening as a result of tightening of the monetary policy, deteriorating business confidence and project executions facing hindrances among other things.

While growth in the current fiscal is likely to moderate to below trend, agriculture prospects remain encouraging with the likelihood of a record kharif crop.

"However, moderation is visible in industrial activity and some services," the central bank said.

The country's industrial output as measured on Index of Industrial Production (IIP) grew by a dismal 4.1 per cent in August (latest data) as high interest rates and gloomy global indicators weighed against the factory output.

In addition to domestic factors, the RBI said global factors may slow down growth.

"With the increasing linkage of domestic industrial growth with global industrial cycle, some further moderation is likely ahead..."

It said capacity constraints seem to be easing in some manufacturing segments, especially cement, fertilisers and steel. Besides, construction activity has slowed and leading indicators suggest that going forward, "services growth may slightly weaken".

According to the the RBI, the planned corporate fixed investment in new projects declined significantly since the second half of 2010-11 and has stayed low in the April-June period of 2011-12.

"Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk," it said.