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We were wrong. We had expected the RBI to raise its policy rate by 25bps – the repo and
reverse repo rates were surprisingly hiked by 50bps to 8% and 7% respectively. The
accompanying statement was predictably hawkish but surprising was the robust assessment
of growth.
The RBI has stressed that inflation remains elevated and above its expectations. It also
believes that the uptrend in non-food manufactured product prices is an outcome of strong
demand pressures. Commodity prices have not meaningfully eased.
We are in agreement with this assessment but at the same time, do not view inflation to be a
monetary phenomenon. Both broad money and credit growth are slowing alongside the
broader economy. In fact, we estimate that even within non-food manufactured product
inflation is confined to commodity and commodity intensive sectors such as metals and
chemicals.
It is not that the RBI has not acknowledged the slowdown in growth. What it however
believes is that the downturn is still gradual. We of course, disagree and that was the basis
for view that the RBI would raise policy rates by 25bps and for the last time in this cycle.
This difference in views notwithstanding, there is little to stop growth from slipping further.
Sluggish reforms, rising cost of capital and global uncertainties are clearly not conducive
factors. In fact, with this policy rate hike and the attendant re-pricing of lending rates, the cost
of capital is set to rise further. For a more detailed analysis of the evolving business cycle,
please refer to our earlier report (Alert | India | What you should not focus on)
The RBI has laid out some signposts for monetary policy going forward. These include (1)
containing inflation and inflation expectations; (2) managing the risk of growth falling below
trend and (3) ensuring that liquidity is adequate to ensure there is no undue stress on the
financial system. In the context of signpost number 2, our view for now, is that the RBI is still
close to done with rate hikes. We will however, take a firmer view after the current
Governor’s analyst briefing.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We were wrong. We had expected the RBI to raise its policy rate by 25bps – the repo and
reverse repo rates were surprisingly hiked by 50bps to 8% and 7% respectively. The
accompanying statement was predictably hawkish but surprising was the robust assessment
of growth.
The RBI has stressed that inflation remains elevated and above its expectations. It also
believes that the uptrend in non-food manufactured product prices is an outcome of strong
demand pressures. Commodity prices have not meaningfully eased.
We are in agreement with this assessment but at the same time, do not view inflation to be a
monetary phenomenon. Both broad money and credit growth are slowing alongside the
broader economy. In fact, we estimate that even within non-food manufactured product
inflation is confined to commodity and commodity intensive sectors such as metals and
chemicals.
It is not that the RBI has not acknowledged the slowdown in growth. What it however
believes is that the downturn is still gradual. We of course, disagree and that was the basis
for view that the RBI would raise policy rates by 25bps and for the last time in this cycle.
This difference in views notwithstanding, there is little to stop growth from slipping further.
Sluggish reforms, rising cost of capital and global uncertainties are clearly not conducive
factors. In fact, with this policy rate hike and the attendant re-pricing of lending rates, the cost
of capital is set to rise further. For a more detailed analysis of the evolving business cycle,
please refer to our earlier report (Alert | India | What you should not focus on)
The RBI has laid out some signposts for monetary policy going forward. These include (1)
containing inflation and inflation expectations; (2) managing the risk of growth falling below
trend and (3) ensuring that liquidity is adequate to ensure there is no undue stress on the
financial system. In the context of signpost number 2, our view for now, is that the RBI is still
close to done with rate hikes. We will however, take a firmer view after the current
Governor’s analyst briefing.
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