Watch out! Another interest rate hike on the way

The Reserve Bank of India on Monday gave strong hints of another hike in its key interest rates at the policy review on Tuesday, saying that high inflation requires further monetary tightening, slowdown in growth notwithstanding.

"The unfinished task of taming inflation warrants continuation of anti-inflationary monetary stance, (though) the downside risks to growth have increased," RBI said in its Macroeconomic and Monetary Developments Report released on the eve of the first quarter review of the credit policy on Tuesday.

. . .

The Reserve Bank of India said it will have to continue the thrust on tight monetary stance till there is "clear evidence of inflation trending close to a level within RBI's comfort zone".

The headline inflation stood at 9.44 per cent for June. The central bank has set an inflation target of 6 per cent for the fiscal-end.

. . .

During the past 15 months, the central bank has raised 10 times its key policy rates -- repo or the short-term lending rate, and reverse repo at which it borrows from banks -- by 425 basis points. The repo is at 7.50 per cent now while the reverse repo stands at 6.5 per cent.

Stating that the monsoon, global commodity prices and the Eurozone crisis have the potential to alter growth path and inflation level, RBI said, "A significant departure of monsoon from 'normal', a collapse of global commodity price bubble, and Eurozone debt crisis assuming full-blown proportion" can alter both growth as well as inflation forecasts.

. . .

The rising inflationary trend in advanced economies poses a threat to increasing price rise in domestic front as well, the Reserve Bank said.

Pointing out that the industrial activity moderated in the first quarter of the fiscal, RBI said a similar trend is likely to continue in the July-September quarter, too.

. . .

The central bank, however, retained its economic growth forecast for the current fiscal at around 8 per cent. A report by RBI-sponsored professional forecasters, however, scaled down GDP growth to 7.9 per cent from earlier projection of 8.2 per cent.

The report expressed the hope that a slight moderation in monsoon may not radically alter the agriculture output.

. . .

Noting that manufacturing activity has become more broad-based on the back of the acceleration in factory output across last fiscal, the Reserve Bank said subdued growth in certain core industries like electricity, cement and natural gas is a drag on overall industrial growth.