Comment: Stuart Davis

'Proactive move, a loud and clear signal'

The Reserve Bank of India (RBI) has hiked the repo and the reverse repo rates by 50 basis points each in its annual policy review for 2011-12, in line with our expectations. This proactive move sends a loud and clear signal to all those following the India story closely, especially foreign investors, that RBI takes a long-term view and is willing to accept moderating growth in the short-to-medium term to curb the immediate threat of high inflation.

RBI has also made the repo rate the single independently varying one and pegged the reverse repo at 100 basis points below the repo rate. It has instituted a new marginal standing facility (MSF) from which scheduled commercial banks can borrow overnight funds (up to 1 per cent of NDTL) at a rate 100 bps above the repo rate. This creates a 200-basis points corridor with repo at the centre, reverse repo 100 basis points below and MSF 100 basis points above the repo. RBI also increased the savings bank deposit interest rate from 3.5 to 4 per cent.

Persistent high levels of inflation forced RBI to adopt an anti-inflationary stance even in the face of moderating growth. RBI seeks to maintain an interest rate environment that moderates inflation and fosters price stability.

RBI also expects inflation to remain at elevated levels for the first half of the year. Higher crude oil prices have still not been passed on completely and will drive up inflation when done. Domestic growth is expected to soften in the near term due to high oil and other commodity prices and due to the impact of anti-inflationary stance. RBI expects lower inflation in the second half with WPI inflation for March 2012 expected at 6 per cent. It has pegged GDP growth in FY’12 at 8 per cent.

Stuart Davis, Chief Executive Officer, HSBC India