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Sumedha Fiscal Services Limited | www.sumedhafiscal.com For private circulation only Main highlights of the polic y Repo Rate hiked by 50 bps to 8%, effective immediately. Reverse Repo Rate adjusts 50 bps higher to 7%. Marginal S t anding F ac ili t y now avail able a t 9% . Cash Reserve Ratio kept unchanged at 6%. R etai ned FY 12 G DP growt h proj ecti on around 8%. R evis ed Mar-e nd inflation proj ec t ion t o 7% vs 6% e a rlier. Inflation to rema in eleva ted for "few more mont hs". F uel pri ce hike in Jun to add 70 bps to inflation. Inflation outlook hinges on monsoon. T he pol icy ac t ion in t his R eview is ex pected t o: R einforce t he cumulati ve impact of p as t a cti ons on dema nd; 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 on demand and supply side s, stronger monet a ry p oli cy a cti ons a re required. R eview/ Impact of Policy Decision The Reserve Bank of India sent shockwaves throughout the market by raising the Repo rate by an unanticipated 50 bps. The market was expecting a maximum 25 basis point hike looking at t he current ec onomi c s cenario. A se t of key dat a played it s part in t he R B I goi ng i n f or such a n aggressive s t ance . O ne of the most important reasons of worry for the RBI is the rise in prices of non-food manufactured products which is way a bove t he a verage of 4% in t he last six yea rs . In it s Ma y pol icy review the RBI had the same view which it has reiterated again this time around. The pattern in this segment suggests that higher costs are being passed onto the consumer where it is being absorbed. The trend in commodity prices especially crude also played a part in the RBI’s hawkish stance . C rude which f ell after t he IE A’s de cis ion to relea se 60 mil lion barrels of oil has started edging 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. Europe is ha ving it s own problems of slow growt h and high inf lation. In t he US the bi gges t worry is the debt ceiling. On the domestic front MSPs of some agricultural commodities, particularly rice and pulses, were increased significantly. This is likely to exert upward pressure on food inflation even if the harve s t is good. Looking ahead, the future decisions of the RBI will depend on two key points. On the domes ti c front, how the mons oon pa ns out wi ll be t he mos t i mport ant fac tor . A good monsoon 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 infusion of cheap money in the market, commodity prices especially crude will witness a spike. This might be balanced by rising inflation in western economies. But overall there might be upside risk in commodit y pri ce s . T he next mid -quarter review of Monetary P oli cy for 2011- 12 is scheduled on S ept ember 16, 2011. Economy R B I Firs t Quarter R eview of Monetar y P olicy 2011-12 J uly 26, 2011 Analyst Ayush R ampuri a E : ayush_rampuria@ sumedhafi scal.com T: +91 33 22298936/6758/3237 (Ext: 53)
