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 last line is informative:
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.