RBI Monetary Policy Review – Expect 25bps CRR Hike

RBI’s quarterly policy review is due on Tuesday, the 29th of July. Inflation continues to be at 12% level and we see some deceleration in growth numbers of Indian corporates. RBI policy officials have gone on record to say,

the government’s first priority is inflation and price stability; we may have to sacrifice a bit of growth to tackle inflation.

We expect the RBI to hike CRR by 25-50bps either in its July 29th policy or later, in August. However, declining oil prices could alter the equation to some extent.

Since the inflation is out of RBI’s 5% comfort zone and the Central Government of India turning a blind eye without banning speculation in essential commodities the RBI is left with no other alternative, but to continue to use a combination of repo/reverse repo and CRR hikes to further temper demand-side pressures.

RBI may further liberalize borrowings through ECB – External Commercial Borrowings route for Indian corporates. RBI may broadly stick to its FY09 growth estimate of 8%-8.5%.