Finance & Economy: Inflation and monetary policy
No CommentWith recent news from RBI officials stating that RBI is considering more REPO rate hike, REPO rate which is also known as short term lending rate by 25 basis point. Few days ago RBI increased this rate by 25 basis point and makes it to 8%. Even though repo rate was hiked in the last week, there is no soothing in inflation rather inflation is touching new heights by reaching the highest 8.75% in last seven years.
The major concern here is will this increase indeed reflecting the slowdown in inflation? Although it is expected to be but last few hike are contradictory in nature and inflation is expected to rise more and may touch double digit mark by October 2008, expected rate of inflation is around 9.70%.
The tighter monetary policy is also going to have an effect on domestic issues. US Sub-prime turmoil has caused tightening liquidity situations and firmness in pricing preventing banks to soften interest rates. “The indirect adverse impact of this (subprime) is being felt in the form of tightening system liquidity and firmness in pricing, which has kept rates from softening. The full impact is still getting revealed and affecting more institutions and countries,” State Bank’s Chairman O P Bhatt said at SBI’s Annual General Meeting in Mumbai.
The Economist Intelligence Unit expects India’s real GDP growth to moderate from 9 pc in FY’08 to 7.6 pc in FY’09, and 7.1 pc in FY’10.
EIU believes that this slowdown would owe far more to domestic factors-primarily the effect of tighter monetary policy to combat inflationary pressures-than to external ones.
Although the gloomy outlook for the US economy will have a negative impact on the Indian economy, that impact would be relatively restrained. India’s level of trade dependency is still among the lowest in Asia, export markets in the rest of Asia would remain relatively strong and Indian banks’ balance- sheets are in good shape.
Even with rising inflation, there was a good news that came last Friday, IIP increased to 7% from 3.5 % compared to that of March 2008. With this news experts are optimistic to and are expecting 8% GDP growth. With the coming monetary policy we can expect the maintaining price stability and ensuring adequate flow of credit to facilitate the growth process.
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