Review of RBI Monetary Policy Q1FY12

Key Policy Action & its Backdrop

RBI has increased the repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 7.50% to 8% with immediate effect.

The reverse repo rate under the LAF, determined with a spread of 100 bps below the repo rate gets automatically adjusted to 7% with immediate effect.

The Marginal Standing Facility (MSF) determined with a spread of 100 bps above the repo rate, automatically adjusts to 9%.

RBI has maintained the baseline projection of real GDP growth at 8% for FY12 on the assumption that the buoyancy in consumption and exports performance, if continued, will contain growth moderation. However, considering the domestic demand-supply balance and global trends in commodity prices, RBI has revised its expectation for WPI inflation for March 2012 to 7% (from 6% indicated in May 3 policy).

The current trends in money supply (M3) and credit growth has remained above the indicative trajectory of the RBI. Keeping in view the evolving growth-inflation dynamics, RBI has revised the indicative projection of M3 growth for 2011-12 downwards from 16.0% to 15.5% and Non-food bank credit growth projection from 19.0% to 18.0%.

The rate hike come in a back drop of:

# Actual inflation being higher than expected,

# Recent increase in domestic administered fuel prices and the minimum support prices for certain food items will keep inflation under pressure,

# Sharp revision in non-food manufactured products inflation during Feb-April 2011 confirms strong demand pressures, and

# Crude oil prices remain volatile