RBI mid-quarter review of the monetary policy - Analysis

While inflation has been more than 9% since Jan, 2011 (which is quite greater than the RBI target of around 7%), RBI has raised repo rates from 4.75% to 8% over the past 18 months. IIP figures for the first 4 months of 2011 (April July) have averaged 5.84% (vs. 8.25% during April 2010 Mar 2011). GDP growth has also slowed to a six quarter low of 7.7% in the first quarter. Typically there is a lag of about 3 4 months for interest rate changes to have an effect on inflation and economic growth. Based on these figures, the RBI may opt to pause, leaving policy rates unchanged. This gives the RBI some time to take stock of the direction of the economy amidst a worsening global crisis. Monsoons have been good this year and there is more possibility of inflation coming down in the near term. Economy cooling down also slows down demand for industrial goods which would have a positive impact on lowering overall inflation. The RBI had raised interest rates by 50 basis points in July (against expectations of 25 basis points). It would want to wait for some more time and look at the IIP figures of August 2011 and inflation figures for Sept & Oct 2011 before taking a call on further rate hikes during the next review in Nov 2011.