Unrelenting focus

In hiking the policy repo rate by 0.25 percentage point on Friday, the Reserve Bank of India is once again reinforcing its past actions in moderating inflation and anchoring inflation expectations. This is in keeping with the trend that began in March 2010 and has, including the latest hike, taken the policy rate from 3.25 per cent to 8.25 per cent in 12 doses. Yet even such sustained monetary tightening has apparently not been enough. Inflation remains the dominant macroeconomic concern, with the wholesale price index (WPI) rising to 9.8 per cent in August, from 9.2 per cent in July. Inflation rate in non-food manufactured products rose from 7.5 per cent to 7.7 per cent during the same period, suggesting strong and persistent demand pressures. The hike in petrol prices by Rs.3.14 a litre, effected on the eve of the policy statement, will have a direct impact of 0.07 percentage point on the WPI, not to speak of the indirect impact that will be felt only after a lag. Various consumer price indices have risen in the range of 8.4 per cent to 9 per cent in July. Food inflation remains stubbornly high despite a normal monsoon. What is clear is that the high food prices are not a temporary phenomenon but the result of a structural imbalance in demand and supply. Viewed in whatever way, inflation and inflation expectations remain well above the RBI's comfort level.The official expectation is that inflation will start moderating, once the effects of past, cumulative action are felt. Any premature change in the monetary policy will be counter-productive and harden inflation expectations. The clamour for “a pause” in growth-inhibiting monetary tightening is countered by the argument that while growth has decelerated it has by no means collapsed. Indeed the GDP growth during the first quarter of 2011-12 at 7.7 per cent is only marginally lower than the previous quarter's 7.8 per cent. Besides, the RBI has conceded that a portion of the growth momentum will have to be sacrificed for the sake of price stability. The central government's finances have worsened during the first four months of the year. An even bigger worry comes from the developed world. The sovereign debt crisis in Europe is assuming menacing proportions. High unemployment and weak growth in the United States have prompted the authorities there to undertake some unconventional measures including an ultra-soft monetary policy. However, the weak demand from the developed world has not softened prices of commodities, including petroleum. As the volatile movements in the foreign exchange markets show, India has quite a task in managing its external economy in the face of mounting global uncertainty.