There was a clear consensus the Reserve Bank of India (RBI) would opt for policy tightening measures with headline inflation touching 9.9 per cent in March 2010. While RBI has increased repo, reverse repo and cash reserve ratio (CRR) by 25 basis points each, the market’s reaction appears to be that these measures are perhaps mild. This is reflected in the immediate dip in the yield of the 10-year government bonds.
RBI continues to be watchful of growth and recognises that there is still a need for a pick-up in private demand and investment for the economy to return to its earlier growth trajectory of over 9 per cent and thus is adopting a cautious approach in increasing interest rates.
The 25-bps increase in CRR would only absorb Rs 12,500 crores, so one would expect that liquidity conditions would continue to remain comfortable in the immediate period. One also does not expect any significant increase in interest rates as a result of today’s measures.
However, given the compulsions of the need to anchor inflationary expectations, one should not be surprised if RBI opts for calibrated monetary tightening measures prior to the next policy statement.