RBI raised repo and reverse repo rates by 25 basis points each, just as the markets expected. We had forecast that rates would be unchanged given the recent aggressive tightening. In line with our expectation, RBI hinted at a short-term pause by saying “the likelihood of further rate actions in the immediate future is relatively low”. Also, RBI tightened the lending rules for mortgage loans.
As expected, RBI maintained its forecasts for GDP growth at 8.5 per cent for 2010-11 and WPI (wholesale price inflation) at 5.5 per cent (six per cent in the old WPI time series). On a sequential (seasonally-adjusted) basis, non-food manufacturing inflation is already responding to the aggressive tightening for the past four months. Higher global commodity prices remain a concern, but food inflation is already easing and will come off more as the new crop comes to the market.
We interpret RBI’s conditional pause signal to mean that it will likely keep rates unchanged at the December 16 review. However, according to our expectations, RBI will probably need to raise rates again in the end-January policy review. The tightening cycle is not yet over; we expect the repo rate to be at 6.75 per cent by June 2011, probably at 25 basis points per quarter.