In its first quarterly review of Monetary Policy FY11, the Reserve Bank of India (RBI) hiked the repo rate (the rate at which banks borrow from the RBI) by 25bps to 5.75% and the reverse repo rate (the rate at which banks park funds with the RBI) by 50bps to 4.5%. The 50-bps hike in reverse repo rate was higher than the street expectation (25bps hike in both rates). Since the repo rate is the operating rate in the current liquidity shortage scenario, the 50 bps hike in the reverse repo rate will have only a limited role to play. From the policy document it is clear that the RBI’s focus has shifted to anchoring inflationary expectations in the economy.
Though the RBI seems sanguine on the economic recovery front, it showed deep concerned about the high inflation in the economy. The central bank increased the economic growth forecast for fiscal year 2010-11 to 8.5% from 8% earlier and the year-end inflation target to 6% from 5.5% earlier.
Another important announcement is that the RBI will now undertake mid-quarter reviews roughly at the interval of about one and half months after each quarterly review. Now this is welcome step, given the fact that in recent years, there have been several occasions when the RBI had to take off-cycle policy actions in response to macroeconomic developments. In fact the frequency of the intra policy actions had increased off late. For example, intra policy rate actions were taken in April, June, Sep and Dec in 2008; in Jan and March in 2009; and in March and July in 2010 so far.
On the policy rate outlook, assessing the current scenario, any change in policy rates during the 16 Sep ’10 mid-quarter review is unlikely. However, I expect 25-bps hike in repo and reverse-repo rates in the second quarterly monetary policy review on 2 Nov ’10
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