Calibrated exit continues

COMMENT/ Amit tandon, Managing Director, Fitch Ratings

The annual monetary policy statement of Reserve Bank of India (2010-11) is a continuation of its policy of calibrated exit from expansionary monetary policies against the backdrop of built-up inflationary pressures and the revival in the domestic economy. The monetary policy revolves around RBI's stated objective of anchoring inflation to a more manageable level without hampering economic growth that is underway.

Some of the counter-cyclical measures taken by central bank in this regard include increasing policy rates by 25 bps. Repo, reverse repo rates, and CRR have all been increased by this amount, a departure from the past when the bank usually increased just one of these rates. While these steps are expected to suck liquidity to the tune of Rs 12,000-15,000 crore from the system and increase the borrowing cost, it still seems a moderate response to rising inflation.

The lack of aggressive measures to curb inflation in the current monetary policy should be seen in the light of RBI's policy intent (to consolidate the current economic recovery and maybe even anchor expectations that inflation is in any case set to come down) along with the constraints imposed by a budgeted government borrowing programme to the tune of Rs 3,45,000 crore in 2010-11. But, don't expect this to be the end of tightenng cycle as inflation may continue to harden in 2010-11 on account of volatile global commodity prices, uncertain prospects of monsoon (at least for now) and across-the-board revival in consumer demand. This could necessitate a more aggressive response by RBI.