Reserve Bank Of India

Reserve Bank Of India

TheReserve Bank of India (RBI) on Tuesday raisedrepo rate by 50 basis points to 8 per cent and reverse repo to 7 per cent in its policy meet to arrest rising inflation in Asia's third largest economy while the MSF rate stands at 9 per cent.

The central bank also raised inflation forecast to 7 per cent from 6 per cent earlier. To make sure there is not much of liquidity crunch the bank leftCRR and savings banks rates unchanged. The central bank also cuts FY12 bank credit growth projection to 18 per cent from 19 per cent earlier.

"Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance," RBI Governor Duvvuri Subbarao wrote in his quarterly policy review.

"A change in stance will be motivated by signs of a sustainable downturn in inflation," he said.

Inflation for the month of June surged to 9.44 per cent from 9.06 per cent in the month of May on the back of higher prices for manufactured goods and fuel.

However in the month of July, inflation showed some signs of cooling off as food inflation for the week ended July 9 came in at 7.58 per cent as against 8.31 per cent the previous week while the fuel price index remained unchanged at 11.89 per cent.

The Reserve Bank of India is amongst the most active Central Banks' in the world to fight against surging inflation which has become a major dampener to a country's growth.

The RBI projects inflation will moderate to 6 percent by end-March 2012. The central bank has raised its key rates for the 11th times since March 2010 whereby it has pushed up the repo and reverse repo rates today to 8% and 7% respectively.

Subbarao said policy actions are expected to "maintain the credibility of the commitment ofmonetary policy to controlling inflation."

The measures are also expected to "reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required," Subbarao said in his report.

Most analysts' expect that the policy tightening cycle will end this year to support India's growth story which was forecasted 9 per cent earlier by the government.

However with inflation shooting off the roof for the government and below expectation industrial output numbers, the government officially pared gross domestic product (GDP) growth forecast for 2011-12 to 8.6% from the earlier 9%

In terms of industries, 14 out of the 22 industry groups in the manufacturing sector showed positive growth in May compared with the year earlier. Textiles and wood products showed the most negative growth at 6.6% each.

While capital goods continued to fluctuate, growing at 5.9%, intermediate goods saw a sharp slowdown to 0.9%, while basic goods led by steel were up 7.2%. Consumer goods were up 5.4%, led by non-durables (up 5.6%) while growth in durables continued to decelerate to 5.2%.

"We actually expect India's growth rate to be slightly less than 8 per cent and will miss the government's target", says Tomo Kinoshito, Chief Economist-Asia, Nomura, in an interview with ET Now. "The basic reason is that India is constrained with the insufficient infrastructure growing problem of land acquisition and shortage of labour force", adds Tomo Kinoshito.

"Those factors are really important and if the economy tries to grow more than the potential rate of growth, this would create the inflation pressures, which prompts the authorities to tighten the monetary policy further", he adds

India's growth story took a hit recently on back of surging inflation, higher cost of credit, rising global commodity prices and rising raw material costs have all contributed to the fall.

"We see a slower growth for the year 2011-2012 for India and a bit of consolidation among certain balance sheets", saysPhilip Wyatt, India Economist, UBS in an interview with ET Now. "We are looking for about 7.5% growth rate, down by 1 per cent from last year's growth rate of 8.5-8.6 per cent", adds Philip.

He further adds, this is predicated on a return in confidence and expeditious moves by the government to try and ramp up infrastructure spending",

The BSE Sensex is among the world's worst performers in 2011, down about 10 percent this year, and according to some analysts it's not one of the cheapest markets.

However some analysts feel that all is not all over for Indian investors and the benchmark has the required fuel to take it to levels above 20,000 by this year-end.

"I am expecting 8% growth for India along withChina. So, India is on a solid growth path for the next two-three years and we have a firm conviction that the Sensex should hit around 22000 to 23000 levels by the end of the current fiscal", says G Chokkalingam, Executive Director & Chief Investment Officer, Centrum Wealth Management in an interview with ET Now.