Today, RBI declared its credit policy.
The key highlights are: Repo/Reverse Repo Rates raised by 25bps - In line with expectations, the RBI in its policy today raised its key policy rates by 25bps.
The repo (liquidity injection rate) now stands at 6.
50%, and the reverse repo (liquidity absorption rate) at 5.
50%.
Going forward, there is a chance of the RBI raising rates by another 50bps in 2011 and 50bps in 2012, taking repo and reverse repo to 7.
50%/6.
50%.
(Pre-crisis repo/reverse repo stood at 9% and 6%.
) Guidance - Growth, Inflation and Liquidity - Not a Very Good Picture 1.
Growth: The RBI has retained its 8.
5% GDP estimate for FY11 with an upward bias; however it is cautious on the outlook for FY12 saying that "growth may decline somewhat" due to agriculture reverting to its trend.
2.
Inflation: The RBI has raised its Mar11 estimate of inflation from 5.
5% to 7%.
While it expects headline inflation to moderate in future, it has warned that "several upside risks are already visible" due to global and domestic factors.
3.
Liquidity: The RBI has distinguished between frictional and structural liquidity.
While frictional liquidity is likely to ease with govt spending, structural liquidity shortages could persist due to the divergence between credit and deposit trends.
In the interim, it has extended its liquidity measures until April.
Inflation - More Needed Than Monetary Policy - The RBI has said that in the growth/inflation dynamics, the balance of risk has tilted towards 'intensification of inflation'.
However it has admitted that given the underlying dynamics, the role of monetary policy is 'confined to containment and prevention of food and energy prices' from becoming generalized.
To this end it has re-iterated that food price scenario is primarily a reflection of structural constraints...
and thus 'unless meaningful output enhancing measures are taken, inflation could become entrenched and threaten the growth momentum'.
Market Impact - With the rate hike in line with market expectations, yields have remained unchanged with the 10-year bond trading at ~8.
16% levels.
Macro Estimates -The relatively benign domestic macro environment has been jolted by investment decisions being deferred; inflation remaining sticky; Current Account Deficit back to historical highs etc.
However, one can expect that an increase in wage incomes both at the rural and urban levels could partially offset the rate/inflation impact and support consumption while investment will take place albeit with a higher price.