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Will the RBI Hike Rates Today?


Look at the first point in the First Quarter Review:

Taming inflation warrants continuation of anti-inflationary monetary stance

  • Inflation risks stay, while growth showed signs of moderation. On current reckoning, growth is likely to stay around trend growth of around 8.0 per cent. However, downside risks have increased. Overall some moderation in growth is expected in 2011-12. Various expectation surveys also indicate the same.

  • Near-term upside risks to inflation remain significant. Price pressures are expected to persist through Q2 as well and then moderate towards the later part of 2011-12. Breaking inertial dynamics of wage and food price rise is important for arresting inflation.

  • Risks to baseline growth and inflation projections may arise from three factors: (1) significant departure of monsoon from normal, (2) a collapse or re-build of global commodity price bubble, and (3) Euro zone debt crisis assuming full-blown proportions.

  • Notwithstanding the slowdown in growth, high inflation requires continued anti-inflationary bias with a close watch and responsiveness to new information.

(Emphasis mine)

Inflation is high and looks like it will stay high unless the RBI takes an "anti-inflationary bias", according to the release. This is suggestive that the rates will go  up. We don’t know if it will be 0.25% (25 basis points) or 0.50%, yet.

RBI goes on to say that world inflation is rising preparing for an "exit from an excessively accommodative monetary policy". Basically, the western economies printed too much, and now stuff will go up in dollar/euro/yen denominations.

Also that inflation has become "generalized" (i.e. not just food) since Dec 2010. Plus, even with a good monsoon, food prices may not fall due to higher costs and higher support prices. That, says the RBI, will take structural reforms to fix, in the absence of which RBI will compensate by using monetary policy.

A quick survey on twitter showed that all respondents (bar one) saw a 25 bps rate hike about half of them saying that it *should* be 50bps but RBI’s chicken.

I expect a 25 bps rate hike, but the strong statements in there have given rise to a feeling, a 20% probability type of feeling, that we might see 50 bps. Few more minutes. Stay tuned.


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