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The government and the RBI have accepted that high interest rates may hurt the country’s growth prospects, but the apex bank has underlined that bringing inflation under control is its major agenda
New Delhi: Moderating economic growth and easing inflation may prompt the Reserve Bank of India (RBI) to halt interest rate hike in the upcoming mid-quarterly credit policy review later this month, reports PTI.
With actual growth coming in well below the potential, there are ‘dis-inflationary’ pressures in the economy, Goldman Sachs economist Tushar Poddar said.
“We therefore expect inflation to fall to 6% by March 2012. We expect the Reserve Bank of India to continue to ease liquidity, first through open market operations, and then by cutting the reserve requirements of banks,” he said.
India’s gross domestic product (GDP) registered just 6.9% in the second quarter this fiscal against 8.4% expansion in the same period last year due to poor performance of the manufacturing, agriculture and mining sectors.
It is expected that RBI would cut interest rates by 100 basis points (1%) in 2012, starting in April, Mr Poddar said, adding that the slowdown in growth and the trajectory of inflation suggests that an earlier easing of policy rates may be appropriate, especially given the severe external headwinds.
Bank of America Merrill Lynch India economist Indranil Sen Gupta said, “Given this backdrop of growth slowing and inflation peaking off, we are relieved that the RBI has finally begun Open Market Operations (Rs1,00,000 crore by January) to cut the money market liquidity deficit and reduce undue pressure on interest rates.”
With inflation likely to come off to 7.2% by March, it expects RBI to cut rates by 100 basis points from April onwards.
The RBI has hiked interest rates 13 times since March 2010 to tame demand and curb inflation, which has been above the 9% mark since December last year.
The government and the RBI have accepted that high interest rates may hurt the country’s growth prospects, but the apex bank has underlined that bringing inflation under control is its major agenda.
In the mid-year credit policy review, RBI had said inflation, ruling near the double-digit mark, will start cooling by December this year and is likely to come down to 7% by March 2012.
As far as food inflation is concerned, the rate of price rise moderated considerably to 8% during the third week of November from over 9% in the previous weeks.
Nomura said in a report that as WPI inflation is likely to moderate slightly in November, in line with RBI’s expectations, raising hopes that the central bank would keep policy rates unchanged at its meeting on 16th December.