Socgen says RBI should tighten but gradually

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The Reserve Bank of India should not tighten policy rates aggressively as it may hurt economic growth, and price pressures are mostly emanating from high commodity prices, a senior Societe Generale economist said on Friday.The Reserve Bank however, should not pause on its tightening mode as it may widen the gap between policy rates and inflation and add to price pressures, Veronique Riches-Flores, head of thematic research at Socgen told reporters.The "important thing is to avoid the increase in the negative real rates as that might fuel inflation pressure. However, the central bank should not tighten very aggressively as it may hurt growth," she said.The Reserve Bank of India has raised its policy rates by 50 basis points since March and the banks' reserve requirements by 100 basis points since January to contain inflation.Some analysts say the Reserve Bank may not raise rates aggressively and prefer to wait and assess the impact of the euro zone debt crisis on the global economic recovery.The reverse repo rate, the rate at which central bank borrows from banks is at 3.75 percent and repo rate, the rate at which it lends to banks at 5.75 percent.India's food price index rose 16.23 percent in the year to May 15, while the fuel price index climbed 12.08 percent, government data on Friday showed. The pace of increase in food prices slackened from the previous week's annual rise of 16.49 percent. The fuel price index rose 12.33 percent previous week.Wholesale price index , the most closely tracked inflation gauge in India, rose 9.59 percent in April, weaker than March's 9.9 percent.Riches-Flores said a 5 percent inflation could be the optimum level in emerging economies including India given the current productivity level. "Inflation has powerful re-distribution effect. Higher salaries will help in reducing debt-burden, which is a good thing for a economy," she said.(Reporting by Suvashree Dey Choudhury; Editing by Ramya Venugopal)
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