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With inflation exceeding its expectations for the quarter under review, the Reserve Bank of India hiked the repo rate by a higher-than-anticipated 50 basis points , despite signs of a moderation in growth.
With this hike, the RBI has increased the repo rate by 325 bps since March 2010 to dampen aggregate demand in order to control inflationary pressures. The policy action was accompanied by an upward revision in the RBI's baseline projection for WPI inflation for March 2012 to 7 per cent from 6 per cent with an upward bias and hawkish guidance, linking a change in the policy stance to a visible, sustainable downturn in inflationary pressures.
Inflationary pressures
Concerns relating to inflation remain on account of the suppressed inflation related to incomplete adjustment of administered fuel prices and inadequate revision of electricity prices, and the possibility that inflation related to some food items may not ease despite a favourable monsoon.
In the event of a reversal in the recent trend of easing commodity prices, pass though of the same to prices of non-food manufactured products may add to inflationary pressures in the coming months.
ICRA expects WPI inflation to remain above 9 per cent in H1FY12 and may surpass 10 per cent in some months. Accordingly, another rate hike in the short-term cannot be ruled out.
While the RBI changed its policy stance to ‘manage the risk of growth falling significantly below trend', it retained its baseline projection of 8-per-cent GDP growth.
Given the adverse impact of elevated inflation on the investment demand and overall economic growth in the medium-term, the Government needs to take steps to dampen aggregate demand through fiscal tightening and tackle the supply-side constraints on a priority basis.
This rate hike is likely to further impact the lending and deposit rates in FY12.
While we do not yet revise our FY12 estimates of a 17-18 per cent credit growth and 16-17 per cent deposit growth, it would be a challenge to meet credit growth estimates.
(The author is MD & CEO, ICRA)
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