In line with expectations, the Reserve Bank of India (RBI) raised its key policy rates by 25 basis points (bps) on Tuesday. The repo (liquidity injection rate) now stands at 6.5 per cent, while the reverse repo (liquidity absorption rate) is at 5.5 per cent.
Going forward, RBI may raise rates by 50 bps in 2011 and another 50 bps in 2012. The pre-crisis repo/reverse repo stood at nine per cent and six per cent, respectively.
On guidance for growth, inflation and liquidity does not paint a good picture. RBI has retained its 8.5 per cent gross domestic product growth estimate for 2010-11, with an upward bias. However, it is cautious on the outlook for 2011-12, saying “growth may decline somewhat” due to agriculture reverting to trend.
RBI has raised its March estimate of inflation from 5.5 per cent to seven per cent. While it expects headline inflation to moderate, it has warned that “several upside risks are already visible” due to global and domestic factors. RBI has distinguished between frictional and structural liquidity. While frictional liquidity is likely to ease with government spending, structural liquidity shortage could persist due to the divergence between credit and deposit trends. In the interim, it has extended liquidity measures till April.
RBI has said in the growth/inflation dynamics, the balance of risk has tilted towards “intensification of inflation”. However, it admitted, given the underlying dynamics, that the role of monetary policy is “confined to containment and prevention of food and energy prices”.
It has reiterated that the food price scenario is primarily a reflection of structural constraints. Thus, “unless meaningful output enhancing measures are taken, inflation could become entrenched and threaten the growth momentum”.