RBI has already assumed GDP growth in the current year at “around 8 per cent” based on the professional forecasts in the range of 7.4 per cent to 8.5 per cent with 90 per cent probability. It does not see at present any evidence of “sharp or broad-based slowdown” in the economy, according to the mid-quarter review of June 16, 2011, though risks for global recovery and financial stability are on the high side.

After its sharp hike in lending rates in its annual policy statement of May 3, RBI has predictably limited revision of key rates to 25 basis points, raising the repo rate – becoming the single varying policy rate – from 7.25 to 7.5 per cent. Similar rises take reverse repo to 6.5 per cent and the Marginal Standing Facility (MSF) to 8.5 per cent.

The repo rate takes the middle place among policy rates and its increase gets automatically adjusted to the other two rates. Currently the corridor remains with fixed 200 basis points but RBI had said in its annual policy statement that the corridor could be changed if monetary conditions so warrant.

With WPI rise unrelenting at 9.1 per cent in May (provisional, subject to upward revision as has been happening for previous months till March when it was 9.7 per cent), RBI is adhering to its ‘firmly anti-inflationary” stance with no near possibility of any let-up in prices pressures. And Government is yet to transmit international oil prices to domestic retail prices, as subsidy reduction is crucial for its fiscal consolidation programme.

The latest policy action will undoubtedly raise lending rates across a broad spectrum of borrowers but RBI expects its stance to contain inflation and anchor inflationary expectations by reining in demand side pressures. It also aims at mitigating the risk to growth from “potentially adverse global developments”.

On the growth front, the bank’s June review notes that while signs of moderation are visible in some sectors, broad indicators of activity like the fourth quarter (2010-11) profit growth and margins and the credit growth of the banking system do not suggest “a sharp or broadbased deceleration”.

Going forward, RBI said, notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high. Against this backdrop, the monetary policy stance remains “firmly anti-inflationary, recognising that, in the current circumstances, some short-run deceleration in growth may be unavoidable in bringing inflation under control”..

The review, within six weeks from the annual policy statement, finds the global environment has changed for the worse, while domestic conditions are broadly consistent with projections made in May statement. There is visible moderation in growth expectations in advanced economies while some have begun to experience inflationary pressures from global oil and commodity prices.

For India, according to RBI, global commodity prices still remain the key external risk though some signs of moderation are becoming visible. Domestically, inflation is persisting at uncomfortable levels and the headline numbers understate the pressures because fuel prices have yet to reflect global crude oil prices. RBI had in May estimated the likely inflation rate at the end of the year (March 2012) at 6 per cent 'with an upward bias'.

The global economy weakened in the second quarter (April-June) of 2011, growth moderating in both advanced and emerging market economies under the impact of high oil and commodity prices. Global growth outlook is also clouded by the spillover from the Japanese natural disasters and from monetary tightening in emerging economies (China included) to contain inflationary pressures. Further, the sovereign debt problem in the euro area has increased uncertainties with EU leaders being unable so far to work out a second bail-out for Greece where the debt problem has flared up..

India's economy decelerated to 7.8 per cent in Q4 of 2010-11 from 8.3 per cent in the previous quarter though for the year as a whole GDP growth was 8.5 per cent.. While private consumption was robust, RBI noted, investment activity moderated in Q4 of 2010-11. Industrial data recorded a sharp deceleration in the second half of last year. Industrial growth in April remained moderated to 6.3 per cent though capital goods production remained buoyant.

Overall, despites deceleration in some important sectors, notably interest-sensitive ones such as automobiles, there is no evidence of any sharp or broad-based slowdown, RBI says. Corporate earnings growth and profit margins in the fourth quarter of 2010-11 were broadly in line with the performance over the past three quarters, suggesting that demand remained steady, and in the face of sharp increases in input costs, pricing power remained intact. Credit growth has been steady.

Nevertheless, RBI assessment is that the slackening of global recovery, high oil and commodity prices, intensifying sovereign debt problem in the Euro area, and some slowdown in domestic investment demand may pose downside risks to the growth of the domestic economy. High prices of oil and other commodities could adversely impact the current account balance, fiscal balance and household spending and corporate margins. These collectively could also pose some downside risks to the performance of the financial sector, it noted in its latest Financial Stability Report. Elevated inflation and rising interest rate may also impact on the balance sheet of financial entities. (IPA)