With Inflation showing no signs of abatement and corporate profits on the upswing, it is high time that RBI act as an independent regulator in the interest of Indian consumer and not South Block.
In the forthcoming announcement of monetary and credit policy on July 27, markets expect 25bps hike in both repo and reverse repo rates and no change in CRR. This expectation is based on the view that as the economy inches towards normalcy, policy rates also need to firm up to their long-term ‘steady-state’ level. Any more aggressive tightening is unwarranted at this juncture in analysts view. Global growth uncertainty has mounted considerably in the past couple of months, domestic liquidity remains tight, and some other indicators of monetary conditions such as exchange rate (on REER basis), money supply and credit growth hardly suggest need for an aggressive monetary tightening. Further, our more nuanced approach of looking at the WPI basket suggests that demand overheating concerns are clearly over-emphasised. In our assessment, the RBI is not “behind the curve” and we expect repo rate to touch 6.0-6.25% level by March 2011.
RBI, starting October 2009, embarked on a path of gradually exiting from an expansionary monetary policy. To start with, the SLR was restored to pre-crisis levels and then as economic recovery firmed up and inflation began to accelerate, the central bank used CRR and both policy rates to tighten monetary conditions in the economy.