Monetary Policy Predictions

Finally the D-day is here..the day when RBI Governor Dr.D Subbarao will announce the monetary policy putting (or rather saying probably putting) an end to the much speculated move of RBI..will it hike the rates, which rate will be hiked and how much..before RBI announces the rates here is MoneyBol’s take on the same…

Inflation

As known to all, inflation is the biggest concern for RBI. In our  Inflation WPI March 2010 update a few days back, we saw that the inflation rate, has already crossed RBI’s target of 8.5%, The YoY inflation number of 9.9% for March 2010 is much higher compared to 1.2% observed a year earlier. The food articles have risen 16.65% since March 2009. The manufactured products too have sharply risen by 7.13% since March as compared to 2.29% observed a year earlier. Measures to alleviate pressures from excess liquidity that may exacerbate inflationary concerns have been taken by the Central Bank earlier. Liquidity had been curtailed via a CRR hike of 75 bps in the January Policy.

Mr. C.Rangarajan, Chairman, Prime Minister’s Economic Advisory Council (PMEAC) remarked “The RBI may want to wait for a few weeks to see if food prices will decline on account of the rabi output. Then it might want to tighten liquidity and if inflation still persists, then it will act on policy rates”

Going forward, inflationary concerns are expected to subside slowly with forecasts of normal monsoons, better crop production, good performance of manufacturing sector and lagged effect of monetary policy changes. On the upside risk of rising crude oil prices remain which could trigger inflation again.

Industrial Production

IIP is still growing at double digits and poses good for the economic growth of the country. However in the last month’s release, it seems that IIP seems to be moderating. As stimulus measures are wound up, IIP growth will be mainly driven by domestic demand. Thus in the coming days, IIP may not be able to post the god growth that has been observed post June 2009. A moderation in IIP growth may prevent RBI from taking aggressive measures.

Liquidity

Since the last 75 bps hike in CRR in February, liquidity has come down from the highs of +100,000 cr mark seen in January, but liquidity exists in the system to the extent of Rs 50,000-Rs 60,000 cr. RBI may want to retain some liquidity in the system in order to carry out the G-Sec auctions process smoothly, but on the flip side it will also not like the liquidity to fan inflation. Thus it would like to get rid of some liquidity from the system.

Conclusion

These are some of the most important considerations that will dictate RBI’s decision. A 25 bps hike in all the rates viz Repo, reverse repo and CRR. It is also expected that it may hike the rate by 50 bps. A 25 bps hike in CRR removes about Rs 12,000 cr of liquidity from the system. Considering this, I think that RBI may hike the CRR by 25 bps only and wait for hiking it by another 25 bps for some time. Regarding, repo and reverse repo rates, with RBI’s mid policy hike in March, it has given strong signal of a tightening stance. It will continue with the same. But at the same time, it will not like to derail the growth process by indulging in aggressive rate hikes. A 50 bps hike after the 25 bps hike in March, may pose threat to the nascent growth prospects. Recent developments have given early signals of a moderating inflation, thus RBI may hike the policy rates by 25 bps only instead of 50 bps and prefer to resort to mid policy hike for any further increases in the rates.

Author name: Praveen Bajaj, MBA (SCMHRD)

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