RBI hikes key rates by 50 basis points

As part of the First Quarter Review of Monetary Policy 2011-12, the Reserve Bank of India (RBI) announced an increase in the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points. The repo rate will accordingly move up from 7.5% to 8.0%. The marginal standing facility (which is at 100 basis points above the repo rate) will be at 9%. The rate hikes are the eleventh successive hike since March 2010.

In a survey conducted among 22 economists by Bloomberg News, 20 estimated a 25 basis points rise, while the remainder expected no change.

In the Policy Statement the central bank maintained its economic growth forecast of 8% for the current fiscal year while it revised the baseline projection for WPI inflation for March 2012 upward to 7.0%.

As per the RBI the considerations behind the policy move were as under:

• First, demand pressures have remained strong. As indicated by RBI in its previous Policy Statement (3 May 2011), inflation was expected to remain elevated in the first half of 2011-12. Actual inflation so far has been even higher than expected. In particular, non-food manufactured product inflation has been significantly higher than the average rate of 4% over the last six years. Crude oil prices remain volatile and are a major risk factor. The recent increase in domestic administered fuel prices and the minimum support price for certain food items will also keep inflation under pressure.

• The second consideration that shaped the RBI’s policy decision is that there are signs that growth is beginning to moderate, particularly in respect of some interest rate sensitive sectors. However, there is no evidence, as yet, of a sharp or broad-based slowdown. Several indicators such as exports and imports, indirect tax collections, corporate sales and earnings and demand for bank credit suggest that demand is moderating, but only gradually.

• Although the impact of past monetary policy actions is still getting transmitted, considering the overall growth-inflation scenario, the RBI determined that it is necessary to persevere with the anti-inflationary stance.

　

Monetary Policy Stance was as under:

• To maintain an interest rate environment that moderates inflation
  And anchors inflation expectations;

• To manage the risk of growth falling significantly below trend; and,

   Finally, to manage liquidity to ensure that monetary transmission
   Remains effective, without exerting undue stress on the financial
   System.

　

The Expected Outcomes of today’s policy actions are the following:

• First, the cumulative impact of past actions on demand will be
   Reinforced

• Second, the credibility of the commitment of monetary policy to  
  Controlling inflation, and thereby to keeping medium-term
  Expectations anchored, will be maintained;

• Third, the policy actions will reinforce the point that in the absence of
  Complementary policy responses on both demand and supply sides,
  Stronger monetary policy actions are required.