Reserve Bank of India Holds Mid-Quarter Policy Review

March 15, 2012

Officials at the Reserve Bank of India pre-empted previous expectations that its mid-quarter review would produce a half-percentage point cut of reserve requirements by announcing an even larger reduction of 75 bps on March 10.  By getting ahead of the curve of expectations, the authorities further underscored a shifting policy bias from restraint to contain inflation to support for mounting global and domestic growth risks. In January, the cash reserve requirement had been cut an initial time by 50 basis points to 5.5%, and a streak of 13 straight interest rate hikes had been broken when officials instead decided to leave the repo and reverse repo benchmarks unchanged at 8.5% and 7.5%.  The reverse repo rate had increased 200 basis points in 2010 and another 225 bps last year.

The mid-quarter policy review released today did not cut reserve requirements any further nor did they start to reduce interest rates.  The review concludes

Recent growth-inflation dynamics have prompted the Reserve Bank to indicate that no further tightening is required and that future actions will be towards lowering the rates. However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions.

Fact is that this shift is occurring even as inflation remains excessive.  “Upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippage and rupee depreciation.  Besides, there continues to be significant suppressed inflation in fuel, fertilizer and power as administered prices do not fully reflect the costs of production.”  Wholesale prices in February were 6.95% higher than a year earlier. 

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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