With Inflation remaining higher than RBI’s comfort zone led by rise in global commodity & crude oil prices along with confluence of structural demand and supply-side factors domestically, the RBI continued its tightening process by hiking repo & reverse repo rates by 25bps each as expected.
Economic growth momentum is showing signs of moderation & investment is yet to pick up meaningfully. Liquidity conditions have improved recently with pick-up in spending & rising deposit rates. Expectation of likely ramp up of Government spending will continue to ease liquidity deficit, however, it may elevate demand-side pressure on inflation.
RBI has already rendered effective tightening of 350bps with cumulative repo & reverse rate hike of 200bps & 250bps respectively and tight liquidity scenario since mid-2010. Given the upside risk to inflation, RBI may continue to maintain anti- inflationary stance & maintaining price stability may remain the key policy imperative. We expect another 25bps hike in the next policy meet.
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