RBI

The 25 bps hike in repo rates was widely expected a majority of market players. The accompanying statement maintains its hawkish stance by saying it is premature to change its stance. It maintains that it will persevere in its inflation-fighting mode with gusto till it sees visible signs of inflation coming off. As monetary policy operates with a lag, RBI expects demand moderation and reversal in inflation trajectory towards the second half of FY11-12. It points out that inflation in food, fuel and non-food manufactured products is above its comfort zone. Further it alludes to suppressed inflation due to incomplete pass-through of domestic prices  (i.e. diesel, LPG and kerosene still being sold at far lower prices and any future increase feeding into inflation)as also from recent depreciation in rupee and increases in electricity prices by states recently. Rise in Food inflation despite good monsoons indicating it is structural in nature. Fiscal deficit at 55% of budget estimates in the first four months  v/s 42.5% in the same period last year is another area of concern. Fall in IIP in July has been dismissed by pointing out that excluding the volatile capital goods segment IIP in July  2011 is actually higher at 6.7% vis-à-vis 4.4% in June 2011. Although RBI has highlighted ,it sees downside risks to its growth projection for FY12 Impact of global turmoil in Europe and USA on weakening of export demand from India and domestic monetary tightening  impacting local demand after a lag has been mentioned by the RBI. But on balance it feels it needs to continue its tighter bias for some time. So on the whole while RBI does concede the likely impact of tightening will start moderating growth and inflation in second half it will not relent till it sees it  reflecting in sobering inflation numbers.