With Inflation remaining high, the Reserve Bank on Monday indicated that it may go for another round of interest Rate hike tomorrow even though the step may impact the economic growth.
"Inflation risk persists. The policy choices have become more complex. In this backdrop, the monetary policy trajectory will need to be guided by the emerging growth- inflation dynamics even as transmission of the past actions is still unfolding," RBI said in its review released on the eve of mid-year monetary policy announcement tomorrow.
Though the risk to growth is becoming visible, the challenge of bringing down inflation to an acceptable level on a sustainable basis remains significant, it further said.
On account of various global and domestic factors, the RBI said, "growth in 2011-12 is likely to moderate slightly from that projected earlier".
The RBI had projected the economic growth, or GDP expansion, for the current fiscal at 8 %, down from 8.5 % in 2010-11. However, with rising cost of inputs and high interest rates, industrial output is likely to remain subdued in the coming months.
The Reserve Bank of India (RBI) has raised interest rates by 350 basis points since March, 2010 in its bid to contain inflation, which has remained near double-digit. The rate of price rise was 9.78 % in August, while food inflation was 10.6 % for the week ended October 8.
A senior Plan panel official said the interest rate hike will not have any bearing on either inflation or economic growth.
"On inflation, it (rate hike by RBI) will not have much impact in the short-term. Rate hikes are aimed a brining down inflationary pressures in the long-term," Planning Commission Principal Adviser Pronab Sen said when asked about impact of possible hike in key rates by RBI.
According to a recent survey by the Confederation of Indian Industry, business confidence, especially among smaller firms, has declined in recent months. The CII's quarterly business confidence index has declined by 2.5 % in the third quarter of 2011-12 as compared to the previous quarter.
Of 30 analysts polled last week by Reuters, 17 expect the Reserve Bank of India to increase the key lending rate by 25 basis points on Tuesday, while 13 expect it to hold the rate steady. The forecasts were among the most balanced in recent quarters.
The expected rate increase by RBI would be its 13th since March 2010 and will make home and car loan costlier.
(Source: Economic Times)