Our main worry is inflation,not growth

More rate hikes in the future,the central bank says that challenge of containing inflation persists.

The Reserve Bank of India on Thursday gave ample signals that it is more concerned about inflation,not growth. Hiking the repo and reverse rates by 25 basis points each,the RBI said,domestic inflation remains high and much above the comfort zone of the Reserve Bank. The RBIs main concerns are the non-food manufactured products inflation that rose in May 2011 after showing some moderation in April and domestic fuel prices that do not yet reflect the current trends of global prices.

Although global commodity prices moderated in recent weeks,it is too early to downgrade this as a risk factor. Monetary transmission has strengthened. The impact of the RBIs recent monetary policy actions is still unfolding. The challenge of containing inflation and anchoring inflation expectations persists, it said,hinting at more rate hikes in the future.

Allaying fears over any slowdown,the RBI said,Overall,even as there is deceleration in some important sectors,notably interest-sensitive ones such as automobiles,there is no evidence of any sharp or broad-based slowdown. Corporate earnings growth and profit margins in the fourth quarter of 2010-11 were broadly in line with the performance over the past three quarters,suggesting that demand remained steady,and in the face of sharp increases in input costs,pricing power remained intact. Credit grew steadily,while the composite Purchasing Managers Index (PMI) for May 2011 suggests reasonably good conditions.

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Non-food manufactured products inflation was 8.5 per cent in March 2011. Provisional data indicate that it increased from 6.3 per cent in April to 7.3 per cent in May 2011,numbers much above its medium-term trend of 4.0 per cent. This pattern in non-food manufactured products inflation is a matter of particular concern. Besides reflecting high commodity prices,it also suggests more generalised inflationary pressures; rising wages and costs of service inputs are apparently being passed on by producers along the entire supply chain, the RBI said.

The headline inflation rate was 9.7 per cent in March 2011. In April 2011,it was 8.7 per cent and rose to 9.1 per cent in May 2011. The numbers for April and May are as yet provisional and,given the recent pattern,these numbers are likely to be revised upwards. Thus,headline WPI inflation rate remains elevated,consistent with the projections made in the Annual Policy Statement of May 3,it said. According to the RBI,GDP growth decelerated to 7.8 per cent in Q4 of 2010-11 from 8.3 per cent in the previous quarter. While private consumption was robust,investment activity moderated in Q4 of 2010-11.

Sensex closes below 18,000 points

Dalal Street faced selling pressure as the RBI increased key policy rates for the 10 time in a row in its bid to tame rising inflation. The key BSE Sensex fell below the 18,000 level and settled the day at 17,985.88,a sharp loss of 146.36 points or 0.81 per cent from its last close. The NSE 50-share Nifty also fell by 50.75 points or 0.93 per cent to finish at 5,396.75.

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