Ahead of RBI’s monetary policy on Friday, 29 Jan, the domestic Macro scenario has improved with industrial production at 10-11% growth, inflation with the Dec reading crossing the RBI’s Mar 10 target of 6.5% and Loan growth returning to the double-digit range.
The street expects the RBI to begin normalizing rates with a 25-50bp increase in the CRR and 25bp increase in repo and reverse repo rates. Surprise could also be a withdrawal/roll-back of some of the liquidity injection measures taken during the crisis.
Another section of the market have set a tone that RBI may delay the hikes saying that there is nascent signs of a pick up in loan growth.
Given the upside surprises seen on the growth front, the RBI could raise its FY10 GDP estimate of 6% (with an upward bias). However, more important will be its guidance on inflation, which has already crossed 6.5% (policy makers have been stressing more on the importance of asset price inflation rather than commodity price inflation.