RBI to pause hikes if core inflation stabilizes: report

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RBI to pause hikes if core inflation stabilizes: report
India's central bank RBI has said that it may cease its continuing monetary tightening cycle if the inflation in non food manufacturing items becomes stable. The RBI raised its benchmark rates the repo and reverse repo rate by 25 basis points last week. This was its tenth rate hike since March 2010 .The current repo rate is 7.5 percent and the reverse repo rate is 6.5 percent.

Despite the rate hike, the inflation is still hovering near double digits. Headline inflation for the month of May 2011 was 9.06 percent compared to 8.66 percent in April 2011. Food inflation for the week ended June4 was down marginally to 8.96 percent from the previous week where it was 9.01 percent.

Inflation in non food manufacturing items stood at 6.3 per cent in April2011 and increased to7.3 per cent in May, 2011, much above its medium term trend of 4 percent. RBI says that non food manufacturing items like fuel and power are the main drivers of inflation.

With continuous rate tightening India's economic growth has slowed down a bit. Its GDP growth in Q4 2011 was 7.8 percent which was the lowest in five quarters while, industrial output growth also slowed down to 6.3 per cent in April 2011 .RBI expects growth to be 8 percent in the current fiscal year2011-12 down from 8.5percent in 2010-11 and inflation to moderate to 6 percent by the end of the current fiscal year 2011-12.

RBI says that the monetary tightening has not caused a drastic effect on growth as the economic data indicates but it will definitely take the factor of growth being hampered by inflation into consideration before deciding for further rate hikes.

Read more about: rbi, inflation, economy, interest rate
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