Inflation forces RBI to make credit costly
Mumbai, July 27: The Reserve Bank of India (RBI) reiterated its confidence in India’s growth story by hiking the GDP growth rate to 8.5 per cent from eight per cent in April on Tuesday. But it stressed it “worrisome” feeling on the inflation front which ran the risk from domestic and global factors.
Considering the dynamic nature of the global economy, the RBI has embarked on two initiatives. One, it is going to have more frequent policy reviews — mid-term reviews — instead of the present quarterly reviews and secondly it has decided to set up a working group to review the current operating procedure of monetary policy of the RBI including the liquidity adjustment facility (LAF).
Explaining the apex banks worries, the RBI governor, Dr D. Subbarao, said that the new factor in the inflationary content was the demand side pressures which were clearly evident.
Capacity constraints were visible in several sectors and pricing power is returning to producers. The consumer is no longer king. Demand side inflationary measures had to be contained, he said.
He also observed that despite the 75 basis points increase in repo and reverse repo rates this year real policy rates are not consistent with the strong growth that the economy is now witnessing.
Considering the inflationary pressures and to contain inflationary expectations, the RBI raised its repo rate that is the rate at which it lends to banks by 25 basis points or a quarter percentage points from 5.5 per cent to 5.75 per cent and its reverse repo rate (the rate at which it pays banks for parked funds) by 50 basis points from four per cent to 4.50 per cent.
Though rates have been hiked, the bankers have said they are not thinking of hiking interest rates immediately. “It (hike in bank rates) will depend upon what is the view regarding credit uptake. I don’t think any bank would take the decision to hike,” said SBI chairman, Mr O.P. Bhatt.
In fact, according to bankers and even the Reserve Bank, easy interest rates are likely to last till the next quarter. This means that home loan borrowers can live with cheaper rates for some more time.
Similarly till credit growth picks up and there is a liquidity crunch, depositors can expect an increase in deposit rates. Till now banks had enough liquidity not to bother about depositors. A lot of big depositors and corporates also prefer to keep their money in other more attractive assets than banks.
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