Has RBI thrown the baby out with the bathwater?

We are happy that the Reserve Bank of India (RBI) has indicated a pause after today’s 25-basis point policy rate hike, assuming inflation remains in check.

In any war against inflation, some sacrifice has to be made in terms of immediate growth to ensure future growth. At the same time, monetary policy must be forward-looking. We share RBI forecast that inflation would moderate to 7 per cent levels by March, 2012.

In our view, the current 7.5 per cent growth rate is an achievement in itself, relative to the global context. The policy rates are very high in terms of transparency, as RBI has made its forward-looking stance very clear. Giving a hint that probably this is the last rise, would help borrowers to take more informed decisions.

The deregulation of the savings deposit rates is indeed a big step in interest liberalisation. This would lend flexibility to banks to introduce different products in the interest of the retail customers. Introduction of instruments like new two-year and five-year cash settled interest rate futures, credit default swaps and changes in short sales of gilts would lend depth to our markets.

We expect, lending rates to come off by 100 basis points in the coming April-September slack season, once RBI begins to cut policy rates and the 10-year government bond yield to calm down to mid-cycle eight-8.5per cent levels by March. The government's disinvestment programme would be key in guiding further action by the RBI.

Sajjid Chinoy
India Economist JP Morgan