Jan. 24: A day before coming out with the credit policy, the Reserve Bank of India again underlined its single biggest fear — rising prices or inflation. The central bank has expressed a fear that rising prices could take away gains of economic growth. This has lead to expectations that the central banker may raise policy rates more than expected.
Economists were factoring in a hike of a quarter per cent in the key policy rates earlier, but are not ruling out a much higher increase of half a per cent now.
While these increases will not have an immediate impact on the common man, they will result in higher interest rates on bank loans in the medium term. By making credit more expensive, RBI hopes to bring down prices.
In its report on macroeconomic developments, RBI has observed that persistently high inflation can threaten growth and also risk inclusive growth. Therefore, containing inflation has to be the predominant objective of the monetary policy, it has said. India is currently witnessing a phase of high prices — with food price inflation in double digits and wholesale price index up over 8 per cent.
All may not be well in the next year either. A survey commissioned by Ficci predicts that price rise would continue to remain a problem for the government in FY12 also. RBI has already raised policy rates — repo and reverse repo — by six times since March 2010. These increases made their impact felt by the end of 2010, when several banks revised upwards borrowing and lending rates.
“Conventional wisdom says that there should be at least a 25 basis points hike in interest rates,” said State Bank of India chairman, Mr O.P. Bhatt. However, the hike could also be more, some feel. “The RBI may be looking at an increase (of short-term rates) of 25-50 basis points... But I personally feel that interest rates are already high and it will impact the growth of retail loans and housing,” said HDFC chairman, Mr Deepak Parekh.