Goldman Says Reserve Bank to Recognize Slow Domestic Demand

Tushar Poddar and Vishal Vaibhaw, Mumbai-based economists at Goldman Sachs Group Inc., comment on India’s monetary policy in a report released today.

The Reserve Bank of India will raise its benchmark repurchase rate by a quarter percentage point to 7.75 percent at a policy review tomorrow, according to 20 of 22 economists in a Bloomberg survey. The rest expect no change.

“We think the RBI’s language will still have a hawkish bias, but will importantly recognize that domestic demand, particularly investment demand, has slowed considerably, and that there are headwinds to growth from the global environment.

“We continue to expect the RBI to hike by another 25 basis points after July 26 in the remainder of 2011, with the next hike likely by October...Inflation and inflation expectations remain at levels so far above the RBI’s preferred target that the central bank would want to err on the side of having done too much rather than too little in its fight against inflation.”

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