RBI Credit Policy

RBI Credit Policy

The Reserve Bank of India, in its annual monetary policy review in FY12, raised repo and reverse repo rates by 50 basis points each. The repo and reverse repo rates now stand at 7.25% and 6.25%, respectively. However, the CRR has been left unchanged at 6%.
• First, global commodity prices, which have surged in recent months are, at best, likely to remain firm, and may well increase further over the course of the year. This suggests that higher inflation will persist, and may indeed get worse.
• Second, headline and core inflation have significantly overshot even the most pessimistic projections over the past few months. This raises concerns about inflation expectations becoming unhinged.
• The third factor, one countering the above forces, is the likely moderation in demand, which should help reduce pricing power and the extent of pass-through of commodity prices. This contra trend cannot be ignored in the policy calculation. However, a significant factor influencing aggregate demand during the year will be the fiscal situation. The budget estimates offered reassurance of a fiscal rollback. However, the critical assumption, that
petroleum and fertiliser subsidies would be capped, is bound to be seriously tested at prevailing crude oil prices. Even though an adjustment of domestic retail prices may add to the inflation rate in the short run, the Reserve Bank believes that this needs to be done as soon as possible. Otherwise, the fiscal deficit will widen and will counter the moderating trend in aggregate demand.

RBI Credit Policy