After the two 50 bps hikes in May and July, another 50 bps hike would have sent a very powerful message on inflation control. Perhaps, the RBI feels that global commodity prices could cool noticeably as the US and Euro zone situation looks messy.
Indeed, one cannot rule out a good downward correction in crude oil in the next three to six months, based purely on demand situation in the US/ Euro zone. A lot also depends on prospective actions by global central banks led by the Fed — if the Fed does more quantitative easing, expect commodities to go up again.
Since CRR still remains untouched, the possibility of the repo rate hike getting passed on by banks is to that extent weakened. But, credit growth appears to be quite robust and liquidity also under continuous deficit. This should theoretically call for deposit rate increases.
On balance, one gets the feeling this rate hike may not get passed on.
As for the inflation scenario, the impact of the petrol price increase on inflation is exaggerated — petrol is an item of final consumption and therefore price increases will result in adjustments in overall consumption expenditure and not in final prices.
Diesel is however a different story. Commercial vehicles (trucking), industry and agriculture together account for 70 per cent of total diesel consumption. Therefore, diesel price increases will feed into input costs and get passed on if demand remains robust.
(The author is Vice-President (Economic Research), Shriram Group of Companies, Chennai. The views are personal.)