In the Monetary Policy Review, the RBI clearly stated it is concerned about the Twin Deficit-s Current Account as well as Fiscal. The RBI expected the overall current account deficit for 2010-2011 to be about 3.5% of GDP. It noted ‘A CAD of this magnitude is not sustainable.’ The RBI was also concerned about the financing of the current account deficit since the faster-than-expected global recovery may enhance the attractiveness of investment opportunities in advance economies, which may impact capital flows to India.
Inflation – The Worst Enemy of India – The RBI increased its March 2011 WPI inflation forecast to 7%, from 5.5%, which is well above its comfort level. The RBI retained its GDP growth forecast for FY11 at 8.5%.
Reacting to the lingering high inflation, the RBI today hiked the repo and reverse repo rates by 25bps each, while leaving the SLR
and CRR unchanged. RBI also set a firm Tone that it will continue its rate hiking cycle. We expect the next hike to be in mid-March, and continue to maintain our view of a cumulative 100 bp in hikes in 2011.