The market is waiting for action of RBI on its coming annual monetary policy on 20nd April 2010.Analysts expecting that firm actions to be taken by RBI against inflation.
India right now has one of the highest inflation rate in the world and RBI seems to be behind the curve despite it started action of exiting its monetary policy ahead of other central banks.As per the weekly data by The Economist,out of 42 major economies only Venezuela seems to have more pressing inflation problem than India.
In these economies,the median increase in consumer prices is 2.5% which is far lower than the India inflation for February 2010 of 14.8%.
As per Goldman Sachs, there are majorly four reason why inflation will be sticky:-
1.Consumer prices are increasing at quicker pace than the wholesale prices.
2.Inflation is no longer restricted to food items;core inflation is also rising as output gap closed.
3.Commodity prices are putting pressure on headline inflation.
4.Inflationary expectations are also building up.
As per analysts,it is safe to assumed that RBI will increase both its policy interest rates by 25 basis points on 20 April 2010 as well as same amount of increase in CRR to absorb excess liquidity in the short term.
There are valid worries that higher interest interest will impact the interest sensitive private investment.But major problem is not about moving from loose monetary policy to neutral monetary policy but about the huge borrowing of Rs. 4 trillion that the government is planning in this fiscal.With private demand for funds expected to pick up,the impact of fiscal policy on domestic interest will be far more serious this year.
So all in all there are many challenges for RBI from inflationary pressure to fiscal policy to large capital inflows in the domestic market.Lets see how the central bank manage all this.
well the inflation figure is out 9.9%, low i wud say then expected.. with the feb IIP at 15%, the rate tightning is bound to happen. A 25 basis point rise in the policy rate will do well for the economy as the growth is still in the nascent stage and the inflation figure is also expected to cum down due to gud kharif crops. A hike of more than 25 basis point might see the bonds yield shoot up, also the FII inflow is a concern. Managing all these issues will be an onerous task for RBI.
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