India’s central bank to review monetary policy Tuesday

October 29th, 2010 - 5:22 pm ICT by IANS  

Pranab Mukherjee Mumbai, Oct 29 (IANS) The Reserve Bank of India (RBI) will conduct its quarterly review of the monetary policy for this fiscal Tuesday amid hopes that policy rates, already hiked five times in 2010, will not be tweaked again to tame inflation.

RBI Governor D. Subbarao will conduct the second quarterly review at 11:30 a.m. Nov 2, while the report on the macroeconomic and monetary developments for the period will be presented a day earlier, the central bank said.

The review comes against the backdrop of India’s annual food inflation still ruling at a double-digit level of 13.75 percent, which policy makers at both the government and the central bank have termed as a matter of concern.

But commercial banks and industry hoped the rates will be kept unaltered.

“We hope RBI to maintain status quo on rates, as it can hurt loan demand during the festive season,” said Central Bank of India Chairman S. Sridhar, while all three apex chambers had hoped there will be no more tightening of policy.

In the previous mid-quarter review Sep 16, the central bank had hiked its short-term borrowing and lending rates by 50 basis points and 25 basis points, respectively, continuing with its tight monetary policy stance since January to tame inflation.

Accordingly, the repurchase rate stood revised to 6 percent from the earlier 5.75 percent, while the reverse repurchase rate was hiked to 5 percent from 4.5 percent in what was the first mid-quarter review of the policy for this fiscal.

This review had seen the fifth 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 and then on July 27 — to rein in inflation.

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 repurchase 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.

Earlier this week, Finance Minister Pranab Mukherjee had said high prices remained a matter of concern, as there was a limit to which money supply could be curbed to rein in demand, since maintaining growth, too, was important.

“High inflation has affected family budgets. Prices of food items like vegetables, rice, wheat and pulses remain a big concern,” the finance minister told the annual Economic Editors’ Conference here.

“The government has taken measures both from supply and demand sides to control high inflation. On the supply side, the Reserve Bank has taken measures to curtail excess liquidity,” he said.

“But we can’t create liquidity crisis,” Mukherjee said. “Sometimes you can’t control the prices, but mitigate the adverse impact on affected people. We are providing food at subsidies prices. The Reserve Bank has taken suitable measures.”

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