Managing growth & inflation has become challenging for policy makers:

India has sustained GDP growth of 8.9% in first two quarters of the year,

On commenting RBI Credit Policy Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance Co Ltd said "Indian economy is facing severe headwinds of high Inflation, retarding Growth & ballooning Current Account deficit. Managing growth & inflation simultaneously has become very challenging for policy makers. India has sustained GDP growth of 8.9% in first two quarters of the year, however its Industrial Production growth has come down substantially from double digit growth in first half of the year to 2.7% in November ’10 and it is expected to be bad for month of December ’10 as well. Larger part of this retardation in due to slowdown in manufacturing sector, which may get reflected in retardation of GDP growth for next two quarters. At the same time, inflation has remained much high. WPI at 8.43% and CPI- Industrial Workers at 8.33% are high and leading to higher inflationary expectations. Although large part of inflation is due to supply driven constraints, inflation has also remained high due to rising crude & commodity prices. Most of the emerging markets including China are making efforts to fight inflation. Some tightening can help control demand when supply bottlenecks are leading to price rise. However, simultaneous efforts to fight inflation by emerging economies would help bring down commodity price driven inflation. Although credit growth has picked up to approx 25% as on 31st Dec ’10, Liquidity in system is tight (Rs.72,000 crore Repo) which is tighter than RBI’s indicated level of Rs. 50,000 crores. In light of falling manufacturing growth and rising inflation & tight liquidity conditions, policy decision has opted for – Increasing Repo & Reverse Repo rate by 25 bps so as to control inflation. Provided incremental liquidity in system to support growth".