RBI raises policy rates; acknowledges emerging risks to growth: Edelweiss,

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The Reserve Bank of India (RBI) raised both repo and reverse repo rates by 25bps each to 6.75% and 5.75%, respectively, in its mid quarter policy review today. The policy statement was sufficiently hawkish, emphasising inflation as the the central bank’s dominant concern. Nonetheless, the policy dilemma of weakening growth and rising inflation was well reflected in the statement. The inflation pressures are becoming broad-based as reflected in the rise in almost all categories of core inflation whereas growth momentum in the economy has dipped due to slowing investment growth. Now, since the policy rates are already higher than neutral rates, further tightening will further hurt investment growth. Hence, any increase in rates may come at the expense of growth. Nonetheless, given the inflationary pressures, RBI is likely to persist with its current anti-inflationary stance. We expect further rate hikes of 50bps in the current calender year.