Peak not in sight

A 25-bps increase in policy rates by RBI did not spring a surprise. However, the accompanying statement leaves no doubt that the anti-inflationary bias in monetary policy is going to continue. RBI is not swayed by the common perception that growth momentum is slowing across the board and hence, does not view it as a reason to consider pausing now.

There is no hint that we are anywhere close to the peak of the rate hiking cycle. We expect at least another 50bps of rate rises in the next two policies, as headline inflation is likely to stay above nine per cent for close to six months more. Th pass-through of diesel and cooking gas prices is still incomplete and the trajectory of global commodity prices and impact of monsoon on food prices will be important determinants of our inflation outlook.

However, apart from headline inflation, pricing power of companies and inflation expectation of households will be factors the RBI will be closely watching. So, a sustained decline in non-food manufacturing inflation will be a precondition for RBI to change its policy stance. Also our indicator of monetary conditions, indicates that though some normalisation has taken place since early 2010, it is still not tight enough.

The writer is Regional Head of Research, India, Standard Chartered Bank