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The RBI quite predictably lifted its policy repo rate by 25bps to 7.5%. The overall tone of the
accompanying statement remained hawkish in aggregate, but less so than in the previous
one. Specifically, the RBI emphasised that while it will continue with its anti-inflationary
stance, recent global developments could also potentially weigh on India’s growth trajectory.
This acknowledgement suggests that growth management is becoming a policy issue, even
if not exclusively so.
On the hawkish side, the RBI continued to highlight upside risks to inflation arising mainly
from elevated commodity prices. To an extent, the statement also suggested that recent
growth numbers including credit, industrial production (under the new base) and capital
goods production in particularly have not slowed markedly.
What has changed is the outlook. The most important of these is the soft patch in developed
economies and the risks it poses to India’s growth trajectory. Additionally, the central bank
acknowledged that non-food credit is starting to slow and that the transmission from previous
rate hikes had become stronger. Following the 50bps hike in the repo rate on May 3, banks
had raised their base rates by 25bps-100bps.
So where does this outlook leave us. Our view is that the RBI will conclude the tightening
cycle by raising the repo rate by another 25bps for the last time. Growth indicators including
credit, auto sales and the rising cost of capital are pointing to a slowdown. Inflation will likely
remain sticky at around 9% through September, but with credit decelerating, it is not a
monetary phenomenon. We also think that the RBI will not repeat past episodes (mid-1990s
and early 2008) of tightening too aggressively – a double fault at this stage could be costly
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The RBI quite predictably lifted its policy repo rate by 25bps to 7.5%. The overall tone of the
accompanying statement remained hawkish in aggregate, but less so than in the previous
one. Specifically, the RBI emphasised that while it will continue with its anti-inflationary
stance, recent global developments could also potentially weigh on India’s growth trajectory.
This acknowledgement suggests that growth management is becoming a policy issue, even
if not exclusively so.
On the hawkish side, the RBI continued to highlight upside risks to inflation arising mainly
from elevated commodity prices. To an extent, the statement also suggested that recent
growth numbers including credit, industrial production (under the new base) and capital
goods production in particularly have not slowed markedly.
What has changed is the outlook. The most important of these is the soft patch in developed
economies and the risks it poses to India’s growth trajectory. Additionally, the central bank
acknowledged that non-food credit is starting to slow and that the transmission from previous
rate hikes had become stronger. Following the 50bps hike in the repo rate on May 3, banks
had raised their base rates by 25bps-100bps.
So where does this outlook leave us. Our view is that the RBI will conclude the tightening
cycle by raising the repo rate by another 25bps for the last time. Growth indicators including
credit, auto sales and the rising cost of capital are pointing to a slowdown. Inflation will likely
remain sticky at around 9% through September, but with credit decelerating, it is not a
monetary phenomenon. We also think that the RBI will not repeat past episodes (mid-1990s
and early 2008) of tightening too aggressively – a double fault at this stage could be costly
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