Continuing with its calibrated monetary tightening cycle, the RBI today hiked the repo and reverse repo rates by 25bps each as inflation continues to be nearly double the medium-term target of the RBI since Jan '10. RBI now projects WPI inflation at 8% by end-Mar '11. We expect one more rate hike of 25bps each in the repo and reverse repo rates in May '11.
n Rate hike on expected lines. In line with market and our expectations, the RBI increased the repo rate (at which banks borrow from the RBI) and the reverse-repo rate (at which banks park money with the RBI) 25bps each in its mid-quarter monetary policy review today, to 6.75% and 5.75% respectively. The cash reserve ratio (CRR) was kept unchanged at 6%.
n Aggressive effective tightening. Today's rate hike in the policy rates marks the eighth consecutive hike since Feb '10. Overall, the RBI has hiked repo rate by 200bps, reverse-repo rate by 250bps and CRR by 100bps in the ongoing rate hike cycle. Moreover, the effective rate hike in the operative rate has been 350bps as the operative rate has changed from reverse repo to repo rate due to change in the liquidity situation.
n Inflation projection revised upwards. The RBI has increased WPI inflation projection for end-Mar '11 to 8% from 7% earlier. WPI inflation inched up, to 8.3% in Feb '11, after softening to 8.2% in Jan '11. Notably, the RBI has mentioned that non-food manufactured products inflation continues to be well above its medium-term trend – it rose sharply, from 4.8% in Jan '11 to 6.1% in Feb '11 – indicating that producers are able to pass on higher input prices to consumers.
n Outlook. The food articles inflation has started considerably softening on account of improved supply and the trend is expected to continue on a likely bumper rabi crop, which will hit the market early next month. The main pressure to inflation, going forward, is likely to come from manufactured products. We expect inflation to be in 6-8% range in FY12e as against 8-11% range in FY11. On the growth front, though the RBI is upbeat on the domestic growth momentum, it seems to be concerned about the slowing investment. Interestingly, in today's release, for the first time, the RBI has indicated, "…risks to growth are emerging". Given these factors, we expect the RBI to hike policy rates once more by 25bps each in the next monetary policy meeting. Thereafter, we expect growth outlook to play a bigger role in deciding the trajectory of the policy rates.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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