Inflation may climb again to touch 5.5% by fiscal-end

Inflation may climb again to touch 5.5% by fiscal-end
The Financial Express, May 19, 2009, Page 2

New Delhi: Inflation, currently at 0.48 %, may again rise to around 5-5.5 % by this fiscal end, forcing the Reserve Bank to tighten money supply, says financial services firm Nomura.

“We expect wholesale price index inflation to rise to around 5-5.5% by end of the fiscal 2009-10, against the RBI’s 4% target,” Nomura said in a report.

According to the firm, the economy and credit growth are expected to recover in 2010, as banks will start easing the credit restrictions.

Therefore, the country may face excess liquidity and so “we expect increasing infationary worries to force the RBI to start implementing exit strategies from its unconventionally loose monetary policy...with the initial focus on liquidity management,” the financial services firm said.

The RBI reduced short-term lending and borrowing rates by 4.25% and 2.75%, respectively since the collapse of Lehman Brothers in the US to infuse liquidity in the system.

The central bank will, Nomura said, initially focus on withdrawing liquidity by issuing treasury bills in the fourth quarter followed by a cash reserve ratio (mandatory cash requirement which the banks have to keep with the RBI) hike of 100 basis points in 2010.

“We expect policy rate hikes of 75 basis points to be followed only later in 2010 once the recovery takes hold,” it said.