Monday, May 2, 2011

RBI Monetary Policy Preview

RBI Monetary Policy Preview.

Expect a 50bp hike

In the forthcoming Reserve Bank of India (RBI) Monetary Policy Review on May 3, 2011, we expect the central bank to come out of the gradual monetary tightening and hike both repo and reverse repo rates by 50bp each to 7.25% and 6.25%, respectively,
as inflationary pressures have consistently refused to abate. We expect the RBI to keep the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) unchanged at 24.0% and 6.0%, respectively.

Inflation remains sticky with upside risks

Wholesale price index (WPI) inflation has consistently remained well above the RBI's upwardly revised comfort levels. Even for March 2011, for which RBI had raised its projection by a full 250bp from 5.5% projected in November 2010 Monetary Policy Review to 8.0% in its March 2011 Monetary Policy Review, actual WPI inflation came in 100bp higher at 9.0%. In fact, this number could rise closer to 10% once provisional figures are revised (considering the recent trend in revisions).

Growth momentum moderating

Growth momentum of the Indian economy has moderated considerably over the past few months, as evident from IIP growth averaging 5.0% during October 2010–February 2011 compared to 10.4% during 1HFY2011 and GDP growth easing to 8.2% during 3QFY2011 from 8.9% in 1HFY2011.

Even though growth momentum has eased off post the gradual calibrated monetary tightening by the RBI, inflation has remained sticky (above the 8.0% level for the last 15 months). Hence, we believe the RBI is likely to resort to a bolder step and hike repo and reverse repo rates by 50bp each.

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