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On July 27, when Reserve Bank of India Governor D Subbarao unveils the quarterly review of the monetary policy, he's expected to put into action the sentiment expressed by the Prime Minister's Economic Advisory Council (PMEAC). Though the high inflation rate may prompt the RBI to tighten money supply by raising both short-term lending (repo) and borrowing (reverse repo) rate on July 27, it's unlikely to sacrifice growth totally.PMEAC head C Rangarajan has said if the RBI does not take strong monetary action to contain inflation, it can opt for a series of "baby steps" after the July 27 monetary review. "Evidence on the funds flow side, as well as on the output side, clearly shows a strong economic recovery. In the backdrop of inflation rates that are more than twice the comfort zone, it is important that monetary policy completes the process of exit and moves towards a bias on tightening," he said last week. Samiran Chakraborty, Regional Head of Research, Standard Chartered Bank, said, "Strong growth and elevated inflation will prompt continuation of monetary policy normalisation. Uncertainty about the monsoon, global growth and liquidity should favour gradualism. We expect the RBI to raise repo and reverse repo rates by 25 bps each at July's policy meeting."Said Prasad Shete, economist from Jaypee Capital Services, "In the light of the high inflation rate of 10.6 per cent in June 2010 and the provisional rate for previous months getting revised on the higher side, it is getting tougher for the RBI to tame inflation." The RBI has already raised CRR by one per cent, repo and reverse repo by 75 bps since January 2010. While the growth momentum seems to be slowing evident from low IIP numbers in May 2010, longer term growth prospects are becoming stronger, showing resilience to external shocks."We believe, RBI is likely to resort to "baby steps" tilting more weight to growth than inflation to continue the momentum. The major concern at this moment is high inflation rate, which is likely to abate in next 6-8 months on high base effect. Improving fiscal state of union govt could reduce its market borrowing in second half of FY'11 as fuel subsidy burden eventually will demise," Shete said. "We expect 25 bps hike in repo and reverse repo rates in the monetary policy meet," said Vikram Kotak, Chief Investment Officer, Birla Sun Life Insurance.According to Ashutosh Datar, economist, India Infoline, since the last monetary policy meeting in April, inflation pressures in the economy have intensified even as growth outlook continues to remain reasonably strong. "Monetary policy remains accommodative with real rates still negative. Further, notwithstanding the 75 bps hike in policy rates by RBI this year and the tight liquidity conditions, lending rates have not gone up. Consequently, we expect RBI to continue its gradual normalization of monetary policy by hiking both the repo and reverse repo rates by 25 bps in the monetary policy meet."Experts also expect another 50 bps hike in policy rates after the 25 bps hike next week through the rest of FY11. "It is inflation, rather than growth, which is the dominant monetary objective currently," Datar said.
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