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RBI Straddles Growth and Inflation Before Rate Announcement


The latest RBI macroeconomic survey (Oct 2011) precedes their announcement on monetary policy today. Key parts in their outlook:

Growth risks have increased on global headwinds, while inflation continues to be sticky adding to the complexity for monetary policy. Should global downturn accentuate, monetary
and fiscal policy space exists, though the current high inflation reduces the degrees of freedom somewhat.

The RBI has some pretty strong words – for a central bank – to describe the slowdown in growth. Few more nuggets on their outlook

  • The benefits of the recent fall in global commodity prices have been largely offset by the rupee depreciation.
  • Even as the global growth cycle seems to be turning, persistence of inflation at high levels would continue to need to be factored in the policy.
  • Generalised inflationary pressures were still in evidence till September 2011
  • It is important to note in this context that inflation may turn out to be stickier than before due to structural impediments. Further room for front-loaded action may be limited.
  • Inflation has proved to be stubborn and may subside only slowly in the rest of 2011-12. The challenge at this juncture is to contain inflationary pressures, while factoring in the lags in monetary transmission,
  • Fiscal policy space may be constrained if inflation stays elevated
  • Current assessment is that growth may moderate slowly and not fall to the levels seen during the post-Lehman crisis
  • The buoyant export growth observed up to August 2011 may not hold out on account of the sluggish growth in the advanced economies and further deepening of global uncertainties.
  • While persistent high inflation is impacting growth, investment is slowing. (RBI blames this on global slowdown impact, the perception of governance issues or corruption, the correction in equity prices and lowered valuations after earlier irrational exuberance)

The last line is informative:

  • Monetary policy trajectory will need to be guided by the emerging growth-inflation dynamics, factoring in the transmission of past actions, that is still unfolding.

So Deepak, What? I thought they will do 50 bps. Really. It seems crazy to have rates at 8.25% when we have inflation at 9.7%, and a 50 bps increase would be the correct measure.

But with so many statements saying growth is already moderating, there is the lag effect of past monetary actions, that they expect that their estimate of 7% by March 2012 is still valid, and so on it seems to me that they have slightly shifted their stance from primarily targeting inflation to moving towards growth.

Will they stop hikes? I doubt it, given the high headline number. But strange things have happened recently where every minister seems to have demanded that RBI stop hikes. Will they bow to political pressure? I hope not, but it could easily happen.

So yeah: I’m torn between 25bps and 50bps at this moment, with a very micro chance of no-hike.


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