As per the RBI, demand pressures remained strong, while actual inflation so far has been even higher than expected. In particular, non-food manufactured product inflation has been significantly higher than the average rate of 4% over the last six years. Crude oil prices remain volatile and are a major risk factor. Inflation can continue to remain under pressure with the recent increase in domestic administered fuel prices and the minimum support price for certain food items.

RBI indicated that in response to its monetary policy measures, scheduled commercial banks have hiked the modal term deposit rate by 165 basis points (bps) in FY 2010-11 and further by another 60 bps during April-July 2011, i.e. 225 bps from March 2010. The deposits growth has improved from 17.4% in early April 2011 to 18.4% in early July 2011, while non-food credit growth decelerated from 21.3% in March 2011 to 19.5% as on 01 July 2011. Non-food credit growth was broad-based with credit to industry, services and personal categories registering higher growth. Disaggregated data suggest that credit to the industrial sector continued to be led by infrastructure.

Monetary Policy Stance

• To maintain an interest rate environment that moderates inflation and anchors inflation expectations;
• To manage the risk of growth falling significantly below trend;
• And, finally, to manage liquidity to ensure that monetary transmission remains effective, without exerting undue stress on the financial system.

Expected Outcomes

• First, the cumulative impact of past actions on demand will be reinforced;
• Second, the credibility of the commitment of monetary policy to controlling inflation, and thereby to keeping medium-term expectations anchored, will be maintained;
• Third, the policy actions will reinforce the point that in the absence of complementary policy responses on demand and supply sides, stronger monetary policy actions are required.

Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which in turn, will be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation. RBI spewed negative surprise with steep 50 basis points hike in repo rates, as against market expectations from a pause to another baby step of 25 basis point hike in repo rates. Aneesh Srivastava, CIO - IDBI Federal Insurance Company rightly said, "With the announcement of 50 bps hike, RBI has taken the Repo Rates to 8%. Such high rates of 8%-plus were prevailing in June 2008 to fight inflation which was at 10%. High rates at that time had retarded the GDP growth drastically to less than 6% and IIP too had started contracting. A gloomy global macroeconomic scenario was also one of the reasons for such a bleak growth environment at that time and similar uncertainties are present even today in US & Europe".