Annual Policy: Surprise

It was widely accepted that the RBI would increase its rates in its annual policy. Many economists were predicting at least 25 basis points increase in the Repo rates. But the RBI kept its policy rates unchanged; Repo Rates at 7.75%, and Reverse Repo and Bank Rate at 6.00%. Also CRR and SLR were untouched at 6.25% and 25%.

The policy also motioned to curb inflation into a range of 4.0% and 4.5% from the current level of just above 6%. Just recently at a lower level of inflation the RBI increased rates to keep inflation under control. But it resulted in only Rupee appreciating to its highest level for last (aprox 10 years). Rupee so far is the best performer amongst the Asian currencies, appreciating about 15% from lows of around 47.04 in July last year. The RBI was letting the Rupee appreciate with the logic that Rupee appreciation would cut down inflation, by lowering the cost for imports. The higher Rupee is actually hurting the small exporters who were unable to hedge their Forex positions.

But RBI clearly stated in the policy that the affect of currency appreciation on Inflation rates is minor. So it looks like the RBI has no concrete measures to cut down the inflation apart from praying for lower price levels. Main source of increase in the WPI is higher Food commodity prices and infrastructural commodities like cements and steel. A good monsoon (for agricultural commodities) and calm Middle East (for crude oil prices) would help in achieving this.

Meanwhile the Nifty soared to new highs at 4167.30 up from 4141.80 showing a 0.62% increase. Till afternoon the Nifty was showing a downward trend on the back of NIKKEI in Japan which closed -1.24% lower at 17236.16.