Central bank to adopt ‘calibrated approach’ to ensure balance between inflation and growth

The central bank is most likely to adopt calibrated approach to fight inflation, to maintain a vital balance between inflation and economic growth. This return to calibrated approach is mainly because of the slow expansion in economic growth in last few quarters. On May 3, the apex bank had gone for an unexpected 50 basis point hike in repo and reverse repo rate to 7.25 and 6.25% respectively, economist and analyst are expecting another hike of 25 basis points in key policy rates as inflation remains at elevated level.

The Reserve Bank of India has increased its key policy rates nine times from March 2010. However, this repeated increase in key policy rates has failed to reduce the consumption demand in the economy. Country’s private consumption demand grew at 8% in 2010-11 although the average inflation rate stood at 8.6%, this strong growth in the consumption demand despite of raising prices and interest rates don’t matches with by the central bank’s estimates and shows that continued increase in interest rate has failed to tame inflation and had adverse impact on the investment scenario of the country affecting the industrial growth. 

As per the new series, the Index for Industrial Production (IIP) stood at 6.3% for April as against 13.3% in the corresponding month of last year, this sharp fall in the Industrial growth was mainly because of decline in manufacturing and mining sector. Analyst and economist believe another hike in RBI’s key policy rates will have adverse impact on the Industrial growth. The interest rates are already at high level because of liquidity shortage in the system resulting high borrowing cost and on the other hand operating margins of corporate are under pressure because of increased input cost, further the much anticipated fuel price hike due to increase in global crude oil price, will make situation more worse.

As the food inflation and headline inflation remain at the elevated level central bank is likely to continue with anti-inflationary stance. The headline inflation for April was 8.66% and food inflation measured by Wholesale Price Index stood to 9.01%, two month high for week ended May 28. However, the last nine consecutive hikes in key policy rate had failed to reduce the inflation and could be seen as partial failure of monetary policy to control inflation. A fresh policy approach is required to make balance between Inflation and economic growth and apart from the monetary, non-monetary policy measures too are required to make balance between growth and inflation.