RBI hikes key interest rates, lowers growth estimate

Second Quarter Review of Monetary Policy for 2011-2012

The RBI has increased the repo rate and reverse repo rate by 25 basis points to 8.50% and 7.50% respectively. The central bank also revised the GDP growth rate for FY11-12 to 7.6% from the earlier 8%, while the projection of WPI inflation has been kept unchanged at 7% for March 2012. The likelihood of another rate hike in December 2011 is relatively low if inflation moves according to the RBI’s projections.

The RBI has also deregulated the saving interest rates. This is subject to the condition that all banks will offer a uniform interest rate on saving bank deposits up to Rs 1 lakh – above this limit; banks may provide differential interest rates. However, there should not be any discrimination between customers on interest rates for similar deposit amounts.

With this, the number of repo rate hikes by the RBI in the past 18 months has reached 13. The rate hike campaign has caused more harm to our economic growth than curbing inflation. This is evident from the fact that the recent IIP numbers in August came in at a mere 4.1%, indicating strong sluggishness in the economy.

Further, we believe that growth is expected to slow down towards March 2012, as the lag effect of all these monetary tightening measures would be felt in Q4 FY12. We, at DSIJ, feel that caution is the keyword for economic growth.