However, while RBI has preferred to increase the policy rate, the communication is much more dovish that what I would have thought. Probably, the RBI found it difficult to pause, with inflation still hovering close to the 10% zone.
Thus, to prevent any misguided direction to the financial markets, the RBI was categorical that it would want to persist with its anti-inflationary stance, given that both inflation and inflationary expectations remain high and inflation also remains broad-based.
Unfortunately, the advantages of the recent dips in the global commodity prices have also largely been eroded by the depreciation in the domestic currency.
But it appears that inflation might have peaked and the elevated levels might just persist for two more months. Clearly, the momentum indicatorsparticularly the de-seasonalised quarter-on-quarter headline and core inflation measures do indicate some moderation.
The expected drop in inflation now provides the central bank with an opportunity to also focus its attention on the growth front.
Definitive signs of slower growth have now emerged. Manufacturing PMI has been consistently dropping from April 2011, but the more pertinent issue is that it is now close to the contraction zone, tending to tip below 50.
And the services PMI is already below 50, indicating contraction in this segment. Further, some lead indicators for growth, such as excise collections, have tended to show a very sharp contraction, while earnings growth for the BSE-30 companies (ex-energy) is also expected to be lower in the second quarter compared to the first quarter. RBI also points out that the fall in new investments since the second half of 2010-11 has been significant and can impact the pipeline investment in the coming years.
Finally, RBI has reduced the growth forecast for this fiscal to 7.6% from 8% earlier. The history of policy tightening by the RBI suggests that it has tended to stay on a pause mode for about 9-12 months in both up and a down cycles.
And this time is likely to be no different. If our case of no dramatic turbulence in Europe and global financial markets turns out to be true, I would not expect RBI to think of bringing down rates before June 2012.
Further, in the absence of any meaningful fiscal correction and with little response from the supply side, inflation dynamics in India can once again get nasty if monetary conditions ease out. And RBI would be mindful of this as it took it significant efforts to contain the inflationary pressures.
n The writer is chief economist, Kotak Mahindra Bank. These are his personal views.