Weak monsoon could stoke inflation, dampen growth: RBI

Weak monsoon could stoke inflation, dampen growth: RBI
The Hindu Business Line, August 28, 2009, Page 1

Our Bureau, Mumbai

The Reserve Bank of India on Thursday set the alarm bells ringing that a deficient monsoon could affect the inflation outlook for the country more than growth prospects for the economy.

It also underscored the fact that large borrowing programmes (the Centre’s budgeted gross market borrowing in FY-2010 is Rs 4,91,044 crore) and a high fiscal deficit (the estimate for FY-10 is 6.8 per cent of GDP) could worsen the actual inflation situation over time, while also putting upward pressure on interest rates.

Trends in global commodity prices in the first quarter of 2009-10, according to the RBI’s annual report for 2008-09, indicate that an upside risk to inflation could persist from a rebound in global commodity prices ahead of the global recovery.

“Increase in minimum support price that may be seen as a measure to support farmers in a below monsoon year, could stoke inflation,” the report warned.

The first quarter review of the Monetary Policy revised the inflation projection for the end of the year to 5 per cent from 4 per cent projected in April and placed the GDP growth at ‘6 per cent with an upward bias’.

Rainfall deficiency during the kharif season could affect the growth and inflation outlook, besides rural disposable income. Despite positive growth and signs of recovery in the first quarter of 2009-10, the growth outlook for the industrial sector remains mixed, the report said.

The RBI is faced with the dilemma with regard to its Monetary Policy stance — while monetary tightening will result in weakening of recovery impulses, an easy Monetary Policy stance could stoke inflation in the future.

“A major challenge for the RBI is to deal with the unpleasant combination of subdued growth with emerging risk of high inflation, which poses a complex dilemma on the appropriate stance of the Monetary Policy,” the report said.