Mar 17, 2011|
What's in store after 8 rate hikes in FY11?
Inflation is the nemesis that has been haunting the RBI for the greater part of FY11. For the eighth time this fiscal the RBI used its monetary policy tools to rein in price rises. The RBI raised the rates at which it borrows from (reverse repo) and lends to (repo) banks by 0.25% each. Thus the repo rate now stands at 6.75% and the reverse repo rate at 5.75%.
The economic growth estimate still remains intact at 8.6% for FY11. Credit growth has also been above the central bank's target. However, inflation is 1% off target. The inflation for March 2011, as per the WPI (wholesale price inflation) is now estimated to be at around 8%, compared to the target of 7%.
There has been some easing in terms of food price inflation, and there are a number of measures in the latest Union Budget which will help control demand-supply imbalances and increase agricultural productivity.
But, the disastrous news flashing from Japan has made us forget two important concerns. Oil prices and Middle East politics. While oil prices may have eased a bit lately, since Japan is a large oil consumer, they may be back up very soon. High crude prices are of major concern to our central bank. Troubles in Libya and Bahrain have not eased as yet. And with threats of a nuclear disaster in Japan, the RBI expects that Japan may substitute thermal energy for nuclear power. This may impact prices of crude oil even further. Either way, at over US$ 100 per barrel, it is still way over comfort levels.
Increased commodity prices, including coal prices and fuel prices are a big concern. It impacts customer wallets, businesses, and overall economic growth. But more importantly it also impacts the fiscal deficit in two ways. Firstly with an increased import bill, and secondly due to higher subsidy costs.
So what does the future hold? With inflation still above comfort levels, the regulatory watchdog has indicated that it will continue with its current anti-inflationary stance until further notice. With the banking sector's loan growth at 23% YoY in FY11, incremental off takes to the retail segment may get marginally hurt in FY12. But what really concerns us is the impact on investment growth and economic activity.
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