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The RBI has kept the policy rate and the CRR unchanged in its mid-quarter policy review as inflationary pressures are yet to diminish, particularly in the case of non-food manufactured products.
However, the guidance provided was distinctly less hawkish, highlighting that further rate hikes may not be warranted and that subsequent monetary policy actions are likely to ease the policy rate. Nevertheless, the RBI has not provided a timeline for the same.
While the pace of growth of the Indian economy has clearly moderated in the recent months, a number of temporary factors contributed towards the substantial contraction (5.1 per cent) in manufacturing output indicated by the Index of Industrial Production in October 2011.
Notwithstanding the measures taken by the central bank to arrest the depreciation of the rupee, it is unclear at what level the currency would stabilise in the near term.
Therefore, the RBI is expected to remain cautious regarding the possibility that a weaker rupee may result in a flaring up of inflationary pressures.
Accordingly, the apex bank is likely to keep the policy rate unchanged in the fourth quarter of 2011-12, and embark on monetary easing in Q1 2012-13, once inflation moderates below 7 per cent.
(The author is MD and CEO, ICRA Ltd.)
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