RBI sets the tone for rate hike in quarterly review

With concerns about the recovery receding, increasing risks of generalised inflation indicate that monetary policy has to continue the calibrated normalisation process.

Going by RBI's previous tone on calibrated normalisation, it is given, that in all probability there will be a 25 basis points hike.

Highlights

Global Economic Conditions

Global output increased by over 5 per cent in Q1 of 2010 but the global economy has hit a soft patch thereafter due to concerns stemming from the sovereign debt situation in the euro area.

Emerging Market Economies (EMEs) are expected to continue the process of normalisation of monetary policy in view of their stronger recovery, emerging inflationary pressures, and risks of asset price build-up. Advanced economies, on the other hand, may further delay monetary exit, due to the emergence of new risks to recovery, as also their well anchored inflation expectations.

Global demand may weaken in the second half of 2010 if the pace of global recovery slows down due to possible escalation of the euro area fiscal stress and adoption of fiscal austerity measures by the advanced economies.