RBI Credit Policy announcement - assessment by Ashutosh Datar, Economist, IIFL

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RBI’s policy action to raise policy rates by 50bps, a break from its preference for calibrated policy rate hike in steps of 25bps at a time, is inline with our expectation and reflects the dominance of fighting inflation over growth in the near-term. Inflation, especially core inflation is at uncomfortable levels and RBI will have to continue policy tightening in the months ahead to contain inflation from becoming generalised at elevated levels. We expect another 50bps hike in policy rates till the end of the year with risks on the upside. As a result we expect lending and deposit rates to go up another 50-100bps over the next few months and coupled with the rate increases over the past year, this will drive a moderation in credit growth as well as overall demand environment in the economy. Consequently, we expect FY12 GDP growth to decelerate to 7.7% - almost 1ppt lower than FY11 GDP growth.