Archive for July, 2011

The RBI today shocked the market by hiking repo rate by an outlier 50 bps taking it to 8% and the reverse repo rate to 7%. Other rates including CRR, SLR were left unchanged. It has kept growth projection at 8% while hiking WPI inflation projection for March 2012to 7% from 6% earlier. M3 growth projection for FY 12 has been reduced from 16% to 15.5% while non-food credit growth projection has been reduced from 19% to 18%

Market expectation had turned benign with respect to RBI policy over the last month or so. This was triggered by heightened global uncertainties (weaker data as well as event specific risks from Eurozone periphery as well as US debt ceiling issues) as well first signs of slowdown domestically (industrial production, purchasing managers’ indices, vehicle sales etc). Importantly, the RBI has acknowledged all these indicators but still chosen to go ahead with an aggressive 50 bps hike. The triggers seem to be as follows:

1. Given the size of the inflation problem as judged by the RBI, it feels the slowdown is not happening sharply enough. Given stretched productive capacities, it seems happy to sacrifice growth further in order to contain inflation (only worried about ‘managing risk of growth falling significantly below trend)

2. It deems the government response to address demand side (presumably fiscal control) and supply side (presumably policy to alleviate bottlenecks) to have been inadequate, and hence has considered a more aggressive monetary policy review.

The guidance for the future is also firmly anchored on inflation trajectory, with the RBI saying that ‘a change in stance will be motivated by signs of a sustainable downturn in inflation’

(courtesy : IDFC MF)


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