The job of a central bank, said Alice Rivlin, a former deputy chairman of the Federal Reserve Board under Alan Greenspan, is to worry, and the first-quarter review of monetary policy for 2010-11 or FY11 shows that the Reserve Bank of India is seriously worried about inflation. In this quarterly review, the central bank has revised its forecast for inflation at year-end (March 2011) to six from 5.5 per cent. From the wording of the statement of the RBI governor, Duvvuri Subbarao, it is very clear that controlling inflation is the biggest priority, and the measures announced underscore that hawkishness. To begin with, the RBI raised both policy rates — the repo rate at which banks can borrow from the central bank by a quarter of a percentage point, or 25 basis points, and the reverse repo rate at which banks lend to the RBI by a higher-than-expected 50 bps. As he had done when announcing the annual policy in April, Mr Subbarao emphasized even more strongly that inflation has moved from food prices and become generalized across all sectors of the economy. Second, the the RBI governor was categorical about actively managing liquidity, saying it would be kept “in balance”. Translate that to mean the liquidity will be kept tightly in check, so that it will not affect the RBI’s fight to bring inflation down from current levels of over 10.5 per cent to six per cent by end-March next year.

The impact of the announced measures is likely to be a hardening of interest rates for loans of all tenors: in other words, across the length of the yield curve. In its policy statement, the RBI kept its forecasts for credit growth at 20 per cent, and money supply growth at 17 per cent. Taken together with the shift to a base lending rate by banks, companies may shift from borrowing working capital from banks to issuing commercial paper. Third, there will now be eight monetary policy meetings in a year, up from four. The RBI has been thinking about this, and aligning to international practice: the global average is eight. It might mute criticism about inter-meeting policy surprises like the one in late June, when the RBI raised policy rates after giving the impression it would wait till this review.

It does, however, raise a question: given the relatively poor frequency of economic data availability, will there be enough to go on at these meetings? Even if there were enough data, there’s the risk of ‘noise’ that might confuse decision-making. The review of actual policy decisions indicates that they still tend to be made on a quarterly basis in most of the world. There was good news from the policy review too: expectations of FY11 gross domestic product growth have been raised to 8.5 from eight per cent. That might be a tad optimistic: given global conditions, those expectations could become resentments in escrow.