Rbi red-flags inflation; looks like status quo

Central bank underscores ills of government hemming it in.   Upside risk to inflation remains due to  “insufficient supply responses, exchange-rate passthrough, suppressed inflation and

expansionary fiscal stance,” the Reserve Bank of India (RBI) has said in its Macroeconomic and Monetary Developments Third Quarter Review 2011-12. In other words, governor Duvvuri Subbarao

continues to condemn the government for two crimes — an abject inability to structurally solve supply-side problems and pathological profligacy — due to which he is forced to carry the can.

So while moderating inflation will provide some space for monetary policy to address growth concerns - meaning Subbarao can and will ease interest rates to rev up the economy down the road —

 this will be, at best, a temporary respite because there is no fundamental battle against inflation being fought, Mint Road alluded. All that means the street sees a status quo monetary

policy review on Tuesday. “Despite the Wholesale Price Index inflation having moderated to 7.5% in December (from 9.1% in November), the RBI is by no means relaxed about inflation, given the

trend in core prices and the likely passthrough from the recent sharp fall in the rupee,” wrote Taimur Baig and Kaushik Das, economists with Deutsche Bank, in a report a few days back.

Tushar Poddar, managing director and chief economist at Goldman Sachs India, concurs. “We expect the RBI to keep the repo rate unchanged on Tuesday,” he wrote, but believes a cash reserve

ratio cut of 25 basis points to ease liquidity could be on the cards. In order to tame high inflation, the RBI has hiked interest rates 13 times from March 2010 to October last by as much as

375 basis points. The RBI also said growth outlook has weakened as a result of adverse global and domestic factors, “so monetary actions will need to strike a balance between risks to

growth and inflation”. Growth, it said, has been impacted by lower external and investment demand, which may also act as a drag in the next fiscal. There has been a sharp decline in planned

corporate fixed investment since second half of 2010-11.