RBI is going to announce the First quarterly review of monetary policy in some time and unlike last time, expectations are quite clear this time. Last time, in April, analysts were divided in opinions about a 25 bps hike or a 50 bps hike or no action by RBI. But this time, analysts are almost certain that RBI would raise the policy rates by 25 bps taking the Repo rate to 5.75%.

Inflationary concerns

RBI has time and again stressed on its concerns on inflation. In the last policy announcement RBI had anticipated that inflation will come down in a gradual manner. But inflation is still reigning in double digits. For June, WPI increased by 10.6% over last June. Increasingly, it is seen that inflation has become more broad-based and manufacturing as well as fuel price inflation has also been rising. For food articles as well, though the growth rate is moderating, but is still at high levels and is not expected to go down substantially unless new crop comes in the market which would be only towards October. Thus inflationary concerns are quite strong and RBI would like to take some action to tame it.

Economic Growth

Economic activity has continued to grow at a good pace. GDP growth for the last quarter was above 8% and for the next year, the growth rate is expected to be higher than last year. IMF in its last World Economic Outlook (WEO) update has projected a growth rate of more than 9% for India in the current year. In recent months, IIP has moderated but is still growing by double digits and some sectors in IIP are showing very good growth. Monsoon has been good till now implying that agricultural growth will also be good and give a boost to the farm income and rural spending levels. This will support RBI’s decision to raise rates.

Liquidity and interest rates

Liquidity conditions have tightened significantly since the last policy announcement. Since May end, when telecom companies made 3G and Broadband wireless access (BWA) payments to the Govt, liquidity has dried up. Banks have been borrowing on an average above Rs 50,000 cr from RBI from its two repo windows on a daily basis. Short term rates (90 day Commercial paper, 90 day T-Bill, call rates) all have moved up. Long term yields, though had come down by about 50 bps from the levels seen in April, but after the July 2 hike in policy rates have hardened by about 20 bps.

In a short time, Dr D V Subbarao is going to announce the First quarterly review of monetary policy and he likely to increase the policy rates by 25 bps.

Author:Praveen Bajaj

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3. RBI Monetary policy January 2011