The Reserve Bank of India’s (RBI’s) 25-basis points increase in rates has not come as a surprise. In our view, balancing growth and inflation has become very challenging, though the central bank does not explicitly say so. This is the first policy meeting wherein RBI has acknowledged downside risk to growth, owing to high commodity prices, particularly the risk of this impairing the investment climate.
The apex bank also notes the slow growth of capital goods output to suggest the investment momentum may be slowing down. Despite acknowledging the downside risk to growth (in contrast with the government’s projection of nine per cent real GDP growth in FY12), RBI’s guidance is that it will “persist with its current anti-inflationary stance.” Essentially, inflation is not giving RBI an opportunity to change its stance and no such leeway is likely in the near term, too.
Real GDP growth is likely to moderate to eight per cent in FY12 from the advance estimates of 8.6 per cent in FY11, thanks to high cost pressures, elevated interest rates, tighter fiscal policy and slower agriculture growth.
At the same time, there are tailwinds to growth from robust exports, strong services sector and the still robust rural consumption demand. These will likely ensure that growth moderates and does not slow very sharply. Overall, a 25-basis point increase in May, with a similar rise pencilled in for the remaining months of 2011, looks very likely.
Sonal Varma, India Economist, Nomura Financial Advisory and Securities