Its a surprise for the market

Updated: Jan 30 2008, 04:59am hrs
RBI has once again surprised the market. Growth moderation in the economy as a result of monetary tightening over the last two years together with a sharp reduction in interest rate by the Fed raised hope that it was time for RBI to start reducing rates. But the RBIs prognosis and policy action today does not support this view. Growth has moderated in some interest sensitive segments but 8.5-9 per cent growth in 2007-08 and expectation of around 8.5 per cent in 2008-09 cannot be termed as slowdown. And buoyant investments ensure that there is no immediate threat to growth.

RBIs main concern and rightly so is that even though inflation is currently within its target, inflationary expectations are rife. High global food, commodity global crude prices will keep maintaining an upward pressure on inflation in the coming months. The RBIs concerns are that the global risks to domestic inflation have only heightened.

To deal with the deluge of capital flows which only accentuates with rising arbitrage, the central bank has hinted at managing capital flows if the need arises. In view of the inflation concerns, RBI did not signal interest rate reduction but rather stability at the current elevated levels. By the time of the next Policy review, growth concerns could overtake inflation worries and we could see rates softening.

The author is director & principal economist, CRISIL