India’s central bank acts on price rise, upbeat on growth (Intro Roundup)

July 27th, 2010 - 7:20 pm ICT by IANS  

Pranab Mukherjee Mumbai, July 27 (IANS) India’s central bank stepped up its attack on rising prices a tad more than expected by hiking two key short-term rates, predicted an eventual increase in interest rates on loans and deposits and raised its forecast on inflation and growth.
The hawkish monetary policy stance was spelt out by Reserve Bank of India (RBI) Governor D. Subbarao Tuesday who hiked the repurchase rate by 25 basis points to 5.75 percent and the reverse repurchase rate by 50 basis points to 4.50 percent with immediate effect.

He also said that the central bank was hiking its forecast on inflation to 6 percent by end-March from 5.5 percent earlier and on economic growth to 8.5 percent for this fiscal from the earlier 8 percent, thanks largely to a pick up in factory output.

Other policy rates were kept untouched by the governor, who conducted the first-quarter review of the apex bank’s monetary policy for this fiscal before the chief executives of commercial banks at his headquarters at Mint Road in India’s commercial capital here.

This was the fourth such rate hike since the apex bank decided to tighten its monetary policy in January — first on Jan 29, followed by another on March 19 and again on July 2 — to rein in inflation that stood at 10.55 percent for June.

“Inflationary pressures have exacerbated and become generalised,” the apex bank governor said, outlining what was his most immediate concern. “The central bank will endeavour to achieve price stability and anchor inflationary expectations,” he said.

“The stance of monetary policy is intended to contain inflation and anchor inflationary expectations, while being prepared to respond to any further build-up of inflationary pressures,” he added.

“As credit demand picks up, we expect lending and deposit rates to go up.”

Repurchase rate, often referred to as the short term lending rate, is the interest the apex bank charges on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for banks, discouraging them to hunt for more funds.

Reverse repo rate, referred to as the short term borrowing rate, is the rate at which the central bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park funds with the central bank.

“This policy will lead to further reining in inflation, which is already going down. But it will also keep us fully on track in terms of growth,” said Finance Minister Pranab Mukherjee, commenting on the review conducted by the central bank.

He said by maintaining status quo on cash reserve ratio and statutory liquidity ratio the central bank has taken a more sophisticated approach, since there would be a natural tightening of credit after auction of spectrum for third generation telecom services.

According to the central bank governor, the measures taken Tuesday will help to:

-Moderate inflation by reining in demand pressures and inflationary expectations

-Maintain financial conditions conducive to sustaining growth

-Generate liquidity conditions consistent with policy actions

-Reduce the volatility of short-term rates in a narrower corridor.

The stock markets, nevertheless, reacted positively to the monetary policy stance of the reserve bank, with the 30-share sensitive index (Sensex) of the Bombay Stock Exchange (BSE) rising 77.17 points, or 0.42 percent, at 18,097.22 points.

“The monetary measures equitably address concerns for reigning inflationary expectations and cooling demand pressures, while also maintaining sustained growth momentum,” said the Associated Chambers of Commerce and Industry of India (Assocham).

“The Reserve Bank’s revised growth forecast at 8.5 percent for 2010-11 depicts positive business sentiments and also is in line with our own projections for the year,” added Chandrajit Banerjee, director general of the Confederation of Indian Industry.

The apex bank made it clear that the prospects of softening of domestic inflation around mid-year of this fiscal was contingent upon moderating food prices and the risk remained over inadequate rainfall adversely affecting specific regions and crops.

This is one of the reasons why the central bank has now decided to conduct mid-quarter review of the policy, roughly every one-and-half months after each quarterly review. Accordingly, the next review will be in September by way of a press release.

Subbarao also spelt out why he hiked the growth outlook to 8.5 percent from 8 percent. “This upward revision is primarily based on better industrial production and favourable impact on the services sector, giving due consideration to the global scenario.”

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