Ultra hawkish RBI signals further rate rises ahead

Noting that controlling inflation was imperative for sustaining medium and long-term growth and investment momentum, the Reserve Bank of India (RBI) raised the repo rate by 50 basis points (taking it to 8 per cent), as against consensus expectations of a 25-basis point rise. RBI also noted the evidence of a broad-based slowdown in growth was not “visible yet”, nor are there any signs of respite from inflationary pressures.

The central bank saw numerous risks to inflation, including (i) persistently high global commodity prices; (ii) lagged impact of the domestic fuel price rise in June; (iii) inflationary impact of the recent increase in minimum support prices of agricultural commodities; (iv) prevailing demand side pressures reflected in core inflation remaining above seven per cent, against RBI's comfort range of 4-4.5 per cent; (v) uncertainty relating to the spatial and temporal distribution of the south-west monsoon rainfall; (vi) potential inflationary impact of the higher-than-anticipated fiscal deficit to accommodate for higher fuel subsidies; and (vii) possible rise in coal and consequently, electricity prices in the coming months, in light of the demand-supply situation.

On economic activity, RBI said though the growth momentum had moderated in rate-sensitive sectors, a broad-based slowdown had not yet materialised, as the overall consumption trend remained buoyant, supported by increases in real wages.

GUNIT CHADHA
CEO, Deutsche Bank India