The Reserve Bank of India (RBI) delivered the thirteenth rate hike in the current cycle to rein in persistently high inflation, but surprised the markets by a bold and explicit forward guidance even against the backdrop of significant global and domestic uncertainties. If the inflation trajectory is close to its current forecast, then RBI expects this to be the last increase in the current cycle.
Although headline inflation remains much above the tolerance level, RBI is drawing comfort from the seasonally-adjusted momentum of core inflation moderating. Also, because of the cumulative and lagged effect of the rate hikes, there are now clear signs of growth moderation and risks on growth and inflation appears to be more balanced now.
In the earlier policies of FY12, RBI has always stressed the importance of demand management through higher rates, but the forward guidance seems to make a departure from that stance. Now, RBI is probably thinking of supporting the supply side by committing to keep interest rates on hold. There is an implicit expectation that the investment cycle would revive if the interest rates are not raised and investors can draw some comfort from the certainty around that view.
Samiran Chakraborty
Regional head of research Standard Chartered Bank India