Thursday, April 22, 2010

RBI Balances Inflation and Financing Needs for Sustained Growth

The Reserve Bank of India tightened monetary policy another notch in its Annual Policy Statement for the new fiscal , hiking the short-term indicative borrowing and lending rates — repo and reverse repo — and the mandatory Cash Reserve Ratio (CRR) of banks by 25 basis points each. As a result of the increase in the CRR, about Rs.12,500 crore of excess liquidity will be absorbed from the system. This move was expected given the high inflation numbers which are now not solely supply driven — with inflation at 9.90% in March and spreading from food prices to manufactured goods. The tightening builds on a surprise inter-meeting rate hike in March. While, not ruling out mid-cycle action, the RBI referred to the fact that growth is coming from sectors which are interest-rate sensitive, and the need to step cautiously so as not to derail growth at this juncture. Lenders have indicated that this move is unlikely to result in an immediate increase in cost of borrowing even though the interest rate bias is clear. Real interest rates are still mostly negative.

The monetary policy stance was formulated in the backdrop of the need to continue steadily with tightening, while attempting to ensure, among other things, minimal disruptions in fund flows, both to the government’s already stretched market borrowing programme and to private corporations, and also to ensure a pick up in private consumption. RBI also mentioned measures designed to deepen financial markets and augment policy transmission channels in future which should gain clarity by its first policy review in July.

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