'Tighten policy stance to fight inflation'

The Reserve Bank will have to continue to tighten its monetary policy stance to arrest the runaway inflation numbers, which is expected to harden further in the medium-term on account of the rising commodity prices in international markets, a senior economist said on Friday.

The pace of tightening, however, should not be aggressive as it may hamper the economic recovery, Societe Generale's thematic research head Veronique Riches-Flores told reporters here.

"Inflation is likely to be a major concern in all major economies, including those of emerging markets, as demand catch-up process is speeding up in emerging economies and supply is constrained by various factors," Riches-Flores said.

The RBI, which started exiting its easy money stance since last October, "will have to continue to tighten its policy to control the high inflation" to avert the pressure it may exert on the domestic economy, she said.

High international commodity prices and food prices have pushed up the country's inflation over the past one year and is currently hovering close to double-digit, putting pressure on the policy makers to rise key rates. The wholesale-price based headline inflation in April stood at 9.59 per cent while the food inflation is currently hovering at over 16 per cent.

The RBI hiked its repo, reverse repo (overnight rates) and cash reserve ratio by 0.25 per cent each to 5.25 per cent, 3.75 per cent and 6 per cent, respectively in its annual monetary policy in April.

The apex bank, on the other side, is also burdened with the responsibility of ensuring adequate liquidity in the system, in view of the high government borrowing and also particularly in the backdrop of continuing uncertainties pertaining to the debt crisis in the Eurozone.

Commenting on the $1-trillion Eurozone package by the European nations and International Monetary Fund, Riches-Flores said although this may support the region as a near-term solution, it will not be sufficient in the long-term. "I would never expect that this (the Eurozone rescue package) would be enough. It was an absolute necessity. But this is not enough given the overall depth of the problem," Riches-Flores said.

According to her, inflation in world economies is likely to inch up over the next 5-10 years resulting in negative real rates and pushing the bond yields into double-digits in emerging economies and to 7-9 per cent range in the developed markets. Besides, Riches-Flores said, this would also create high volatility in exchange rates.