There are good times ahead, however temporarily, for borrowers and depositors. Despite the Reserve Bank raising its repo rate (that at which banks borrow from the RBI) by 25 basis and reverse repo rate (which RBI pays banks for money parked with it) by 50 basis points on Tuesday, the banks have said there will be no need to raise interest rates just now. So loans are not likely to get more expensive in the coming quarter. In fact, there has hardly been any interest rate hikes despite the RBI’s three increases in the repo and reverse repo rates since January. The reason is that there is still ample liquidity in the banking system as credit growth has been sluggish. This is expected to last at least till the next quarter. After that, the RBI expects the credit rate to pick up, which will lead to tightening liquidity. The banks will then increase their lending rates. With tightening liquidity, banks will have to start wooing depositors again and deposit rates too will then go up.
That is the good news from the first quarter review of monetary policy by Reserve Bank governor D. Subbaro on Tuesday. The bad news is that inflation is still a bugbear, and continues to be a source of concern. But there is also a glimmer of hope in this bad news. Almost one-third of today’s 10 per cent-plus inflation is due to food inflation. If there is a good monsoon, the governor said it could ease food inflation considerably. Dr Subbarao put it very in a very beguiling manner. He said when he was a young boy in Andhra Pradesh, if the rains were good everything was all right and God was in his heaven; but if the rains were bad it was a source of considerable worry. Now he was governor of the Reserve Bank, he quipped, but he still had the same worry! The remaining part of inflation was due to the rise in prices of non-food items/manufactured goods: it was zero in November 2009, but rose sharply to 10.6 per cent by June 2010. Consumer price inflation remains in double digits, and is expected to remain so — particularly in the manufacturing sector — due to the current easy money policy and liquidity. It will take some time before the various hikes in policy rates take effect. Besides the monsoon, other factors that could affect inflation are global energy and commodity price movements, which have been softening, and the potential buildup in demand side pressures as domestic growth drivers strengthen.
The RBI has revised upwards its inflation “comfort level” target for March 2011 to 6.9 per cent from 5.5 per cent.
While India still remains the fastest growing economy and the emerging markets are also doing well, growth weakness in developed economies remain a major worry. US Federal Reserve chief Ben Bernanke had referred to the “unusual uncertainty” bogging the American economy. This is a troubling signal from the world’s largest economy — on which the other developed economies literally feed on! The sovereign debt crisis and unemployment in both the United States and Europe remains an area of tremendous concern. The slightest negative cue from these regions sends ripples of instability throughout the world. The developing economies depend on the flow of capital from the developed world, and while too much of capital inflow could cause problems, too little will stunt growth in the emerging markets. This is the threat hanging over most of the world, even those parts where the economic climate is still sunny.