Inflation too high for RBI to cut rates

The Reserve Bank of India (RBI) is unlikely to ease liquidity in the system as inflation levels, both wholesale and retail, are ruling above the central bank's comfort level. Instead, RBI is expected to increase the policy repo rate by 25 basis points to 7.75 per cent to fight inflation.

RBI will announce its second quarter monetary policy review tomorrow.

RBI expects both wholesale price inflation and consumer price inflation to remain range-bound around the current level during the second half of the financial year as well.

Moreover, the persistence of high consumer price inflation during most of the 2013-14 financial year remains a concern, RBI said in its assessment of macroeconomic situation in the country.

The annual rate of inflation in the country based on the wholesale price index rose to a seven-month high of 6.46 per cent in September, driven mainly by a 322 per cent jump in the cost of onions.

Consumer price inflation also quickened pace to 9.84 per cent during September despite a good monsoon.

''The good monsoon should have a salutary effect on food inflation, but second-round effects from already high food and fuel inflation could impart upside pressures on prices of other commodities and services,'' RBI said in its quarterly macroeconomic review released on Monday.

RBI said it expects a "modest improvement" in economic growth in the second half of the fiscal, against a 4.4 per cent growth in the three-months to June, the slowest in four years.

However, a fuller recovery is likely to start taking shape towards the end of the fiscal year on the back of current steps to clear impediments that were stalling projects, RBI said.

With deceleration in private consumption and fall in investment, overall demand conditions remain weak. However, a good monsoon and pick-up in exports, if sustained, could provide some momentum, RBI said, adding that much will also depend on demand management.

External sector risks have reduced as CAD is likely to moderate since Q2 of 2013-14, RBI said, adding that the trade balance has responded to the policy measures taken, with export picking up and gold imports declining.

While money supply and credit growth has been largely in line with the RBI's indicative trajectory, credit flows have increased with greater recourse to bank finance by corporate, RBI noted.

''While financial markets have rallied, near-term uncertainties on account of 'tapering' (US quantitative easing) continue to be a concern,'' RBI said.

''Monetary policy faces an unenviable task of anchoring inflation expectations, amid tepid growth and weak business confidence. It is, therefore, important to craft policy responses so that growth concerns are addressed in an environment of stable prices,'' RBI said.