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The Reserve Bank of India raises key rate by 25
bp as expected
The Reserve Bank of India (RBI) hiked the repo rate by 25 bp and the reverse repo rate by
25 bp, in line with the Bloomberg consensus and our expectations. After today’s decision, the
repo rate moves up to 7.50%, while the reverse repo rate and the marginal standing facility rate
move automatically to 6.50% and 8.50% respectively. The cash reserve ratio remains at 6.00%.
The RBI reiterated that inflation persists at “uncomfortable” levels. According to the central
bank, the headline numbers currently understate the pressures because domestic fuel prices have
yet to reflect global crude prices. The RBI further expressed its concern over high inflationary
expectations leading towards a wage-price spiral (see Exhibit 3).
According to the RBI, monetary transmission has been quite strong from the last policy
meeting, evident from several banks raising their base rates, but credit growth still remains
fairly high. The central bank stated that it will continue to maintain balanced liquidity conditions
such that neither excess surplus dilutes the monetary policy stance nor the deficit poses risks to
fund flows to productive sectors of the economy.
The RBI stated that its monetary policy stance remains firmly “anti-inflationary” and some
short-run deceleration in growth may be unavoidable in bringing inflation under control.
However, the RBI also acknowledged the risks to domestic growth from a slowdown in global
demand. The RBI expressed a need to continue with its anti-inflationary stance but also said that
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.
We think the statement indicates that the RBI will remain in a tightening mode, despite
softer domestic demand data, there is unlikely to be a pause in the near term. We continue to
think the RBI will hike policy rates by another 50 bp in the remainder of 2011, with the hikes
likely front-loaded, with the likely softer core inflation prints from September onwards preventing
the rate hiking cycle going into 2012. We also believe that the RBI will begin cutting rates in
2H2012 on the back of below-potential growth in the remainder of FY12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Reserve Bank of India raises key rate by 25
bp as expected
The Reserve Bank of India (RBI) hiked the repo rate by 25 bp and the reverse repo rate by
25 bp, in line with the Bloomberg consensus and our expectations. After today’s decision, the
repo rate moves up to 7.50%, while the reverse repo rate and the marginal standing facility rate
move automatically to 6.50% and 8.50% respectively. The cash reserve ratio remains at 6.00%.
The RBI reiterated that inflation persists at “uncomfortable” levels. According to the central
bank, the headline numbers currently understate the pressures because domestic fuel prices have
yet to reflect global crude prices. The RBI further expressed its concern over high inflationary
expectations leading towards a wage-price spiral (see Exhibit 3).
According to the RBI, monetary transmission has been quite strong from the last policy
meeting, evident from several banks raising their base rates, but credit growth still remains
fairly high. The central bank stated that it will continue to maintain balanced liquidity conditions
such that neither excess surplus dilutes the monetary policy stance nor the deficit poses risks to
fund flows to productive sectors of the economy.
The RBI stated that its monetary policy stance remains firmly “anti-inflationary” and some
short-run deceleration in growth may be unavoidable in bringing inflation under control.
However, the RBI also acknowledged the risks to domestic growth from a slowdown in global
demand. The RBI expressed a need to continue with its anti-inflationary stance but also said that
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.
We think the statement indicates that the RBI will remain in a tightening mode, despite
softer domestic demand data, there is unlikely to be a pause in the near term. We continue to
think the RBI will hike policy rates by another 50 bp in the remainder of 2011, with the hikes
likely front-loaded, with the likely softer core inflation prints from September onwards preventing
the rate hiking cycle going into 2012. We also believe that the RBI will begin cutting rates in
2H2012 on the back of below-potential growth in the remainder of FY12.
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