GDP Growth: Though the GDP growth in the first half at 8.9% YoY has been higher than RBI's growth projection for the current fiscal, RBI maintains the projection at 8.5% as monetary tightening to contain inflation may moderate growth.

Inflation: India's WPI Inflation that witnessed some moderation between August and November 2010 accelerated again in December 2010 on account of a sharp increase in prices of vegetables, mineral oil and minerals. Non-food manufacturing Inflation remains high. According to the Reserve Bank rising global commodity prices can aggravate inflation and hence RBI has revised its inflation projection upwards from 5.5% to 7% by the end of the fiscal.

Monetary Aggregates: Growth in Money Supply at 16.5% is in line with RBI's projection of 17%. The non food credit growth at 24.4% is far above the bank's projection of 20%. However to prevent build-up of demand side pressures RBI has retained projections for growth in money supply and non-food credit at 17% and 20% resp.

Current Account Deficit: The Current Account Deficit widened from US$ 12.1 bn in the 1st quarter of 2010-11 to US$ 15.8 bn in the second quarter. In the first half of the fiscal, the Current Account Deficit expanded to 3.7% of the GDP from 2.2% in the corresponding period previous year. The RBI expects the Current Account Deficit to be 3.5% of the GDP by the end of this fiscal.

Impact of the Policy Stance

The hike of 25 basis points in the repo and reverse repo rates is aimed at anchoring inflation that continues to stay at elevated levels. At the same time it is expected this hike would not derail the economic growth that might have been adversely affected had the rate hike been 50 basis points. However the recovery in global markets and improving consumer sentiments may harden the global commodity prices and we may see another hike in next review.

The Non food Credit growth as on 31st Dec'2010 stood at 24.4%, far above RBI's projection of 20% for the current fiscal The banks may raise their lending rates if the credit offtake remains strong and the deposit growth is not in conformity with the credit growth. The Banking stocks that had risen immediately after the announcement slipped into the red in the noon trades. The Banking index declined 2.34% with ICICI and HDFC bank being the biggest draggers (ICICI bank and HDFC bank declined 4.21% and 2.85% respectively) The Auto and Realty indices also declined by 1.05% and 1.20% respectively in the noon session on the concerns that the banks might raise the lending rates if the credit demand remains strong. In the Auto Space M&M and Tata Motors were the biggest losers while in the realty sector Unitech was the biggest loser with a decline of 3.11%.