RBI hints at tightening monetary policy

Mumbai: The Reserve Bank of India (RBI) hinted at a marginal hike in key policy rates when it reviews its monetary stance tomorrow, saying inflation was still above the comfort zone and that there was uptick in credit to non-food sectors, reports PTI.

"Elevated inflation remains a challenge for monetary policy," RBI said today in its report on macroeconomic and monetary developments, ahead of tomorrow's second quarter review of FY10-11.

Overall inflation was 8.62% in September, although the government expects it to slip to 6% by December.

"Food inflation continues to remain high despite a good monsoon, as price pressures have amplified for certain non-cereal items like milk, eggs, fish and meat whose output is less responsive to monsoon," the central bank said.

Food inflation was 13.75% for the week ended 16th October. It has remained in double digits for the past three months.

The RBI also noted that credit to non-food sectors was healthy, although loan disbursals to the agriculture sector had declined.

The bank said its objective was to maintain growth and moderate inflation - a hint that a nominal hike may be on the cards tomorrow.

The RBI's professional forecasters' survey pegged gross domestic product (GDP) growth at 8.5%, which is a tad higher than the 8.4% it had forecast at the last review.

RBI governor D Subbarao will announce the busy season credit policy tomorrow, and he is widely expected to go for another hike in the short-term lending (repo) and borrowing (reverse repo) to rein in inflation.

The central bank has raised the key rates five times so far this year.

While there are lots of factors to propel economic growth, the RBI indicated a few downside risks such as weak external demand, pressure from capital inflows, some moderation in capacity utilization and persistent inflation in food items needed to be kept in mind.

"The uncertain global outlook and the dominance of supply rigidities in certain sectors that impart rigidity to the inflation path, pose greater challenges for monetary policy in its objective of anchoring inflationary expectations without hurting growth," the report said.

"Going forward, the growth-inflation outlook will dominate the policy response," the apex bank.

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