Possible Turning Point in India’s Monetary Policy Cycle

December 16, 2011

The Reserve Bank of India (RBI) left its monetary policy settings unchanged.  The repo (lending) rate and reverse repo (borrowing) rate stayed at 8.5% and 7.5%, and the reserve requirement ratio is 6.0%.  There had been thirteen rate hikes since March 9, 2010, culminating in a 25-bp increase at the prior meeting of October 25 and totaling 425 basis points in all, split almost evenly between 200 bp last year and another 225 bps this year.

Analysts expected the RBI to pause because of a decline in inflation and the darkening global economic outlook.  But the central bank’s statement today takes the additional step of suggesting that the next change could be an easing move.

While inflation remains on its projected trajectory, downside risks to growth have clearly increased. The guidance given in the Second Quarter Review that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated.  From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.

However, it must be emphasized that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress.  The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead.

Growth and inflation have slowed in India.  Real GDP in April-September was 7.3% greater than a year earlier, down from 8.6% growth in April-September 2010.  On-year WPI inflation of 9.1% last month was down from 9.8% in August and at a six-month low.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission. 



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