Reserve Bank of India Sends a Mixed Message

December 16, 2010

The Reserve Bank of India left its policy interest rates unchanged but announced measures to release some primary liquidity in the money market system to alleviate some strains caused by rupee appreciation and sluggish bank deposit growth among other things.  In a new statement, monetary officials admonished that such steps as plans to buy government bonds next month and an announced reduction of the statutory liquidity ratio “should not be construed as a change in the monetary policy stance since inflation continues to remain a major concern.”  Data released earlier today showed renewed acceleration in food prices, which had been falling in the wake of a good rainy season.  Officials have projected 5.5% CPI inflation by March 2011 but concede upside forecast risks associated with robust domestic demand and elevated commodities.  Real GDP was 8.9% greater in 3Q10 than a year earlier, and industrial production advanced by 10.9% in the year to October.

The central bank engineered six interest rate increases in 2010, most recently on November 2.  The key repo rate has been increased from a low of 4.75% prior to March to 6.25%, and the reverse repo has gone up 200 basis points to 5.25%.  More restraint lies ahead in 2011, but officials do not want to turn off liquidity so much that growth slows excessively.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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