MS GEF: RBI too aggressive?
Morgan Stanley’s latest Global Economic Forum has a very detailed essay - Monetary Policy: Is it Too Aggressive, Too Soon? - by Chetan Ahya and Mihir Sheth. You can read & decide whether you agree with the title, but here’s some hard data:
A representative measure for a broad trend in tightening would be the trend in mortgage lending rates. While they had moved up only 0.5% from the bottom of 7.5% during the 17-month period between September 2004 and January 2006 (we call it phase I) and 1.5% in the ten-month period between February 2006 and November 2006 (phase II), it has moved up sharply by 2.5% in the four-month period between December 2006 and March 2007 (phase III).
Over the past 12 months, while the headline overall inflation rate has accelerated to an average of 6.5% in March 2007 from 3.9%, inflation in the manufacturing products basket has accelerated to 6.6% from 1.7% (manufacturing products have a weighting of 63.75% in the WPI). During the same period, inflation in food articles, which have a weighting of 15.4% in the WPI, has accelerated to 10.6% from 5.3%.
In terms of what to watch, they suggest - “Apart from cyclical sector data points like automobiles sales, we believe that the most important indicator would be bank credit growth.”
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