The present scenario is indicates that restraint of inflation is the need of the hour, far more crucial than economic recovery. This is believed to be the RBI’s chief idea when announcing the monetary policy today.
The announcement is broadly anticipated to state that the policy rates are going be hiked further. This will make lending including car loans more costly and thus withdraw additional liquidity from the system.
RBI in its Macroeconomic and Monetary Developments in 2009-10 that formed the basis of the monetary policy had said, “While recovery in private demand needs to be stronger to reinforce the growth momentum, the already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth”.
There are high expectations that RBI would hike cash reserve ratio (CRR), repo and reverse repo rates. It is believed that repo rate would be increased by another 0.25%. but some feel that RBI may touch repo and reverse repo rates but may increase CRR still further.
The RBI anticipates that inflation would be reducing over the next few months from its high. So the apex bank recommends that it is ”important to guard against the risk of hardening of inflation expectations conditioned by near double-digit headline WPI inflation”.