RBI Q1FY12 Policy Review

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8/3/2019 RBI Q1FY12 Policy Review

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Main highlights of the policy

Repo Rate hiked by 50 bps to 8%, effective immediately.Reverse Repo Rate adjusts 50 bps higher to 7%.Marginal Standing Facility now available at 9%.Cash Reserve Ratio kept unchanged at 6%.Retained FY12 GDP growth projection around 8%.Revised Mar-end inflation projection to 7% vs 6% earlier.Inflation to remain elevated for "few more months".Fuel price hike in Jun to add 70 bps to inflation.Inflation outlook hinges on monsoon.

The policy action in this Review is expected to:

Reinforce the cumulative impact of past actions on demand;Maintain the credibility of the commitment of monetary policy to control inflation,thereby keeping medium-term inflation expectations anchored; and

Reinforce the point that in the absence of complementary policy responses ondemand and supply sides, stronger monetary policy actions are required.

Review/ Impact of Policy Decision

The Reserve Bank of India sent shockwaves throughout the market by raising the Repo rateby an unanticipated 50 bps. The market was expecting a maximum 25 basis point hike

looking at the current economic scenario.

A set of key data played its part in the RBI going in for such an aggressive stance. One of themost important reasons of worry for the RBI is the rise in prices of non-food manufacturedproducts which is way above the average of 4% in the last six years. In its May policy reviewthe RBI had the same view which it has reiterated again this time around. The pattern in thissegment suggests that higher costs are being passed onto the consumer where it is beingabsorbed.

The trend in commodity prices especially crude also played a part in the RBI’s hawkishstance. Crude which fell after the IEA’s decision to release 60 million barrels of oil has startededging up higher. Higher crude prices will add upward pressure on inflation since it has a

huge effect on the whole economy. Globally the macro situation is also very volatile. Europeis having its own problems of slow growth and high inflation. In the US the biggest worry isthe debt ceiling. On the domestic front MSPs of some agricultural commodities, particularlyrice and pulses, were increased significantly. This is likely to exert upward pressure on foodinflation even if the harvest is good.

Looking ahead, the future decisions of the RBI will depend on two key points. On thedomestic front, how the monsoon pans out will be the most important factor. A goodmonsoon will help in cooling down prices of agricultural prices. On the global front,commodity prices will be the main factor. There are possibilities that if there is more infusionof cheap money in the market, commodity prices especially crude will witness a spike. Thismight be balanced by rising inflation in western economies. But overall there might beupside risk in commodity prices. The next mid-quarter review of Monetary Policy for 2011-12is scheduled on September 16, 2011.

Economy

RBI First Quarter Review of Monetary Policy 2011-12

July 26, 2011

nalyst

yush Rampuria

ayush_rampuria@sumedhafiscal.com+91 33 22298936/6758/3237 (Ext: 53)

Inflation(%)

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

J a n - 1 1

F e b - 1 1

M a r - 1 1

A p r - 1 1

M a y - 1 1

J a n - 0 9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0 9

N o v - 0 9

J a n - 1 0

M a r - 1 0

M a y - 1 0

J u l - 1 0

S e p - 1 0

N o v - 1 0

J a n - 1 1

M a r - 1 1

M a y - 1 1

J u l - 1 1

Repo(%) Reverse Repo(%)

Borrowings under LAF window(Rs.cr)

100000150000

200000

N o v 1

D e c 1

0 j a n

F e b 1

M a r - 1

A p r i l '

M a y ' 1

J u n e ' 1 1

J u l y '

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RBI Q1FY12 Policy Review

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