Comment: Dharmakirti Joshi, Chief Economist, Crisil Ltd

Confident on growth front

The rise in repo and reverse repo rates by 25 basis points each indicate that RBI is confident on the growth front but worried about the progress on inflation. Although industrial growth has begun to moderate, credit offtake in the first half of 2010-11 has been slow and there is no strong evidence of a generalised demand pressure on core inflation (non-food manufacturing inflation), RBI chose to raise rates. The decision also reflects how the macroeconomic scenario, the nature of global risks and the pattern of inflation have complicated the task of monetary management. Although overall food inflation is moderating, it remains sticky at high levels for some items like eggs, meat and fish due to structural factors and inadequate supply response. The food-led inflation is typically difficult to address directly through monetary tightening, which will at best restrict the second-round effects of high food inflation spilling to other sectors through wage price spiral. The rate rises will also limit the transmission of high raw material inflation into the manufacturing sector.

The move to raise risk weights on housing loans, lifting the loan-to-value ratio to 80 per cent and higher asset provisioning for teaser loans will ensure prudence in lending to the real estate sector.