Inflation numers for the week ended March 15 came out at 6.68% giving the economy a rude shock. With rising inflation and slowing growth, what options does the Government and the Reserve Bank of India (RBI) have to bring it under control?
V Vaidyanathan, Executive Director of ICICI Bank is of the view that with the kind of inflation the economy is dealing with, any cuts in interest rates is ruled out. He said, "Over the next five-six months we will looking forward to some reduction in interest rates, but that looks extremely unlikely now considering the inflation numbers."
He explains that the economy looks at the demand side of inflation, when the interest rates have to be increased. But as per an economic research by ICICI Bank, the inflation cost by the demand side is only 4% and the cost by the supply side is actually 8 per cent.
"So while we got to do some work with the demand side, certainly a lot of work has to be done by the government on the fiscal side to contain the supply side as well," he said.
Hemindra Hazari of Karvy Stock Broking too doesn't see any interest rate cut in the future. "But the RBI has to be doing something to control this inflation and therefore we expect some type of increase in CRR and probably a reverse repo rate," he said.
Hazari is of the view that the hike in commodity prices is the issue and not the money supply. But he thinks lowering interest rates will only aggravate the problem. Expounding on the issue, he said the rise in metal prices due to Chinese demand remains a matter of concern.
According to Commerce Minister Kamal Nath, the government is considering further duty cuts on edible oils, which may be brought down to zero and it may also scrap export subsidy on sugar.
Vaidyanathan said, "Our bank may have to make certain signals, but the CRR looks quite unlikely. For purposes of signalling something, they might touch the repo rate, but that is just to suggest that they are doing something on the demand side. But as I said, the larger work has to be done on the supply side and that is what our expectations really are, CRR unlikely."
While Abheek Baruah, Chief Economist at HDFC Bank thinks the probability of monetary tightening both, in the form of a CRR increase and perhaps a hike in the repo rate has gone up significantly. He said, "The RBI has responded in a textbook fashion in the past and it will continue to do so because I think there a fair bit of pressure on the Central Bank now to reign in prices. So I would think the probability would have jumped up by a good 20-30% points."
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