Analysis: RBI policy targets inflation control over growth
The Reserve Bank of India has raised key rates by a higher-than-expected 50 basis points, stressing that tackling inflation is a main priority even if it comes at the expense of overall growth in the short term.
Moneycontrol Bureau:
The Reserve Bank of India has raised key rates by a higher-than-expected 50 basis points, stressing that tackling inflation is its main priority even if it comes at the expense of overall growth in the short term.The central bank raised the repo rate, its lending rate, by 50 bps to 7.25%, and the reverse repo, its borrowing rate, also by 50 bps to 6.25%. The market had expected a 25 bps hike by RBI.India's headline inflation has overshot even the most pessimistic projections, RBI said, adding it expects inflation to remain at elevated levels, at least in the first half of 2011-12, before coming down.Its baseline projection for WPI (wholesale price index) inflation for March 2012 is 6% with an upward bias. India's inflation in March 2011 rose 8.98% from a year earlier.RBI Governor Duvvuri Subbarao said the monetary policy actions are expected to contain inflation by reining in demand side pressures, and sustain growth in the medium-term by containing inflation."High and persistent inflation undermines growth by creating uncertainty for investors, and driving up inflation expectations. An environment of price stability is a pre-condition for sustaining growth in the medium-term. Reining in inflation should therefore take precedence even if there are some short-term costs by way of lower growth," Subbarao said.RBI estimates India grew 8.6% in 2010-11, but going forward the growth rate is expected to moderate due to high oil and other commodity prices coupled with its anti-inflationary monetary stance.The central bank expects India
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