The RBI has prioritized anchoring inflationary expectations by increasing the Repo rate by 50 bps. RBI has acknowledged the fact that the genie is out of bottle and they need to be bold in words as well as action. Given that inflation has consistently been above their target and the tolerance level while inflationary expectations are becoming quite entrenched with a serious risk of persistent wage-price spiral, a strong action even at the cost of sacrificing growth became inevitable. The policy actions recognize the importance of price stability to maintain long term economic growth. The RBI has guided for a higher inflation in the first half while indicating that the yearend inflation for Mar 12 is likely to be 6% with an upwards bias. These policy actions are expected to reinforce the RBI’s inflation fighting credibility and ensure that the monetary policy objectives are realized in a non disruptive manner considering the current inflation- growth dynamics.
Among other significant steps, the RBI has changed the operating procedure of monetary policy by making the weighted average overnight rate as the operating target and moving to a single operating rate i.e the Repo rate. Moving towards a single operative rate would enhance the effectiveness of policy transmission. The savings rate too has been increased by 50 bps and investment restrictions have been imposed on Bank investment in debt oriented Mutual funds.
The lagged effect of monetary tightening coupled with uncertainties on global front would increase the downward risk for growth prospects in FY 2012.
In this environment, asset prices are likely to remain under pressure for some time. In equity markets, investors would favour companies which have the ability to pass on higher costs.
Thanks & Regards ,
Priyanka Kothari ,
Client Service Associate .
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