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Highlights: RBI ups rates by higher-than-expected 50 bps

Source : REUTERS
Last Updated: Tue, Jul 26, 2011 08:25 hrs
Data revisions can mislead policymaking: RBI

The Reserve Bank of India (RBI) raised interest rates by a higher-than-expected 50 basis points on Tuesday, stepping up its fight against persistently high inflation despite slowing growth in Asia's third-largest economy.

The RBI lifted its repo rate , at which it lends to banks, to 8 percent.

Bigger-than-expected hike

Following are highlights from the monetary policy statement:

POLICY MEASURES:

* RBI raises repo rate by 50 bps to 8 percent

* Reverse repo rate rises to 7 percent

* Cash reserve ratio retained at 6 percent

PROJECTIONS:

* WPI inflation forecast revised upwards to 7 percent for March 2012 from 6 percent earlier

* Retains baseline projection for GDP growth at 8 percent in FY12

* Revises FY12 money supply growth projection downwards to 15.5 percent from 16 percent earlier

* Revises FY12 credit growth projection downwards to 18 percent from 19 percent earlier

POLICY STANCE:

* Need to persevere with anti-inflationary stance considering growth, inflation scenario

* Policy stance to manage risk of growth falling significantly below trend

* Policy stance to manage liquidity to ensure monetary transmission remains effective

* Change in policy stance to be driven by signs of sustainable downturn in inflation

* Policy action to maintain credibility of commitment to control inflation

* Stronger policy actions required in absence of complimentary demand, supply side responses

INFLATION, GROWTH:

* Both level and persistence of WPI inflation are cause for concern

* Recent headline inflation figures likely to be revised upwards

* No evidence yet of sharp or broad-based slowdown in growth

* Signs of growth beginning to moderate in some interest rate sensitive sectors

* Inflation is expected to remain elevated for few more months before moderating towards later part of year

* Monetary policy will contain perceptions of inflation in 4-4.5 percent with focus on non-food manufacturing

* Persistence of high non-food manufactured products inflation suggests producers are able to pass on rising commodity input prices and wage costs to consumers.

* Deficient rainfall in August and higher minimum support price could lead to prices of cereals and pulses going up, while inadequate supply could keep prices of egg, meat, fish, milk and pulses high

ECONOMY:

* Capacity utilisation in fourth quarter of FY11 rose significantly to 77.4 percent, but survey shows decline in overall business sentiment in June quarter.

* Daily average injection of cash through liquidity adjustment facility till July 22 in FY12 was around 480 billion rupees, within 1 percent of total deposits

* Real estate market remained firm, with the RBI's quarterly house price index suggesting housing prices rose in most cities in the fourth quarter of FY11

* The current account deficit eased to 2.6 percent of GDP in FY11 from 2.8 percent in the previous fiscal year on robust export growth in the second half of FY11

* FDI inflows were $7.8 billion in April-May, higher than $4.4 billion in the year-ago period

* Composition of capital inflows remains a concern on uncertain global macro-economic environment

* External commercial borrowing approvals in April-June were at $8.1 billion, compared with $5.3 billion in the same period last year

* The modal term deposit rate of banks rose by 165 bps in FY11, and by about another 60 bps in April-July

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