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. INDIA POLICY - Another
meeting, another hike
As widely expected, the RBI came through with a
25bp increase in the repo rate to 7.5%. The latest
action is the tenth increase in the current monetary
tightening that began in early 2010. Cumulatively,
the RBI has effectively increased policy rates by
425bp in the current cycle. The policy details do not
alter our expectations of the repo rate increasing to
8% later in the year. Most likely, the RBI will hike
25bp at the 26 July policy.
The tone of the policy statement remained hawkish,
as expected (“stance remains firmly antiinflationary”), but there was a new twist. The
guidance that “…while the Reserve Bank needs to
continue with its anti-inflationary stance, the extent
of policy action needs to balance the adverse
movements in inflation with recent global
developments and their likely impact on the
domestic growth trajectory” hints of hikes being
spread out. It is understandable as the current
tightening cycle is already in the mature phase.
The RBI acknowledged that global conditions have
changed for the worse since its last policy on 3 May,
but domestic conditions are broadly in line with its
expectations. It assessed inflation being at
“uncomfortable” levels and, while there are some
signs of moderation in interest-sensitive areas, a
sharp or broad-based deceleration is not apparent.
The increase in non-food manufactured goods (core)
inflation is of particular concern as, apart from
reflecting higher commodity prices, it also suggests
more generalised inflationary pressures from rising
wages and higher costs of service inputs. The RBI
emphasied that monetary transmission has
strengthened, and the impact of prior monetary
tightening is still unfolding.
We continue to differ with the RBI on the
interpretation of higher WPI-core inflation (see
Triple-A - India: Recalibration, 11 May). It
prefers to interpret the change in WPI-core
inflation as indicative of changing demand
conditions. However, this is true mainly for input
prices captured by WPI rather than for final
consumer prices (measured by CPI). It is striking
that softening non-agriculture GDP growth does
not appear to affect WPI-core inflation, which is
more impacted by commodity prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
. INDIA POLICY - Another
meeting, another hike
As widely expected, the RBI came through with a
25bp increase in the repo rate to 7.5%. The latest
action is the tenth increase in the current monetary
tightening that began in early 2010. Cumulatively,
the RBI has effectively increased policy rates by
425bp in the current cycle. The policy details do not
alter our expectations of the repo rate increasing to
8% later in the year. Most likely, the RBI will hike
25bp at the 26 July policy.
The tone of the policy statement remained hawkish,
as expected (“stance remains firmly antiinflationary”), but there was a new twist. The
guidance that “…while the Reserve Bank needs to
continue with its anti-inflationary stance, the extent
of policy action needs to balance the adverse
movements in inflation with recent global
developments and their likely impact on the
domestic growth trajectory” hints of hikes being
spread out. It is understandable as the current
tightening cycle is already in the mature phase.
The RBI acknowledged that global conditions have
changed for the worse since its last policy on 3 May,
but domestic conditions are broadly in line with its
expectations. It assessed inflation being at
“uncomfortable” levels and, while there are some
signs of moderation in interest-sensitive areas, a
sharp or broad-based deceleration is not apparent.
The increase in non-food manufactured goods (core)
inflation is of particular concern as, apart from
reflecting higher commodity prices, it also suggests
more generalised inflationary pressures from rising
wages and higher costs of service inputs. The RBI
emphasied that monetary transmission has
strengthened, and the impact of prior monetary
tightening is still unfolding.
We continue to differ with the RBI on the
interpretation of higher WPI-core inflation (see
Triple-A - India: Recalibration, 11 May). It
prefers to interpret the change in WPI-core
inflation as indicative of changing demand
conditions. However, this is true mainly for input
prices captured by WPI rather than for final
consumer prices (measured by CPI). It is striking
that softening non-agriculture GDP growth does
not appear to affect WPI-core inflation, which is
more impacted by commodity prices.
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