The Reserve Bank of India in its Annual Monetary Policy statement for FY12 departed from its past calibrated approach, delivering a larger dose of rate action while adopting the recommendations of working group on the operating procedure of the monetary policy. A 50 bps rate hike in the repo rate (upped to 7.25 per cent) which is now to become the single independently predicted policy rate is indeed a positive move. The fixed width of the corridor between reverse repo rate and the newly introduced Marginal Standing Facility (MSF) will not only keep the volatility in call market in check, but also improve monetary policy signalling in the economy.
The urgency to clamp down inflation was evident in RBI’s tone when it stated its aim to fight inflation ‘quickly and decisively’ in the Macro and Monetary Developments document released as a prelude to the policy. Today’s rate action is a clear move by the RBI to align itself to prevalent and emerging upside risks to inflation. Amidst elevated global commodity prices, a return of pricing power to corporate/ consumer sectors, robust demand conditions as evident from rising core inflation, and an incomplete pass through of fuel prices; the move was indeed necessitated. RBI has clearly conceded sustainability of medium-term growth an upper hand, by prudently compromising growth in the near term. Given RBI’s guidance towards maintaining a tightening stance, I believe that lending rates are set to move up in the coming months, as banks realign to this tightening stance and higher cost of funds due to the 50 bps hike in the savings rate. We still see room for another 50-75 bps hike in the policy rate going forward by September 2011.
To conclude, as headwinds to growth gather momentum through elevated inflation expectations, the RBI has realigned its guidance to prevailing and emerging risks to near term growth by now acting swiftly on the interest rate front, to prevent the economy from a hard landing.
Rana Kapoor Founder, MD & CEO, YES Bank
