Tough measures expected in RBI’s monetary policy

April 28th, 2008 - 11:11 am ICT by admin  

A file-photo of P. Chidambaram
By Prabhat Sharan
Mumbai, April 28 (IANS) With the annual rate of inflation in India ruling at 40-month highs, tough measures to curb money supply are anticipated when the central bank announces its monetary policy for this fiscal Tuesday, analysts say. An indication to this effect had already come when Reserve Bank of India (RBI) Governor Y.V. Reddy announced a 50 basis points hike in the cash reserve ratio (CRR) for banks in two phases - April 26 and May 10.

The monetary policy will also be announced in the backdrop of India’s inflation rate ruling at 7.33 percent for the week ended April 12, which is more than 200 basis points higher than the five percent tolerance limit set by RBI.

“We will have to wait and watch. Inflation is a problem and needs rectification in fiscal and administrative policies. Changes in monetary policies per se will not be able to contain inflation,” Bank of India chairman T.S. Narayansami said.

Among the measures, some analysts expect a hike in the repurchase rate or repo rate - which is the discount at which the central bank buys back government securities from banks in a bid to contract money supply in the system.

“Any hike in repo rate would only amount to sentimental or a mere signal value. Nothing more than that!” Narayansami told IANS, referring to the instruments at the disposal of the central bank to curb expansion of money supply.

While none wanted to go on record on the quantum of hike in repo rate that the central bank could consider, some felt 25 basis points could send the required signal to the financial system.

The repo rate and the reverse repo rates are at present pegged at 7.75 percent and six percent, respectively, while the cash reserve ratio, on account of the recent hike, will go up to eight percent as on May 10.

The RBI governor also says the level of inflation India is currently witnessing was unacceptable to the central bank - a stand consistent with Finance Minister P. Chidambaram’s remarks, calling for both administrative and monetary steps.

“We anticipated some inflationary pressures, but they turned out to be far more intense than what we anticipated. So the matter has to be examined,” Reddy said in New York, just before revising the cash reserve ratio for banks.

Ahead of the policy, the Associated Chambers of Commerce and Industry of India (Assocham) called for a forward-looking monetary policy that would address the twin issue of restoring investor confidence and withstand the impact of global slowdown.

“Indian companies should be permitted to hike their overseas investment limit by 250 percent from current level of 200 percent of their total net worth,” said V.N. Dhoot, president of the industry chamber.

“Capital inflows should be diverted towards infrastructure investment since this will help in solving the problem of excess liquidity on account of capital flows and help in removing the infrastructure constraints,” he added.

Similarly, the PHD Chamber of Commerce and Industry also expressed concern over inflationary expectations in the economy, but hoped the central bank would abandon the classical solutions to curb price rise that is increasing the interest rates.

“In the Indian context, it is proved beyond doubt that a higher interest rate regime sets in motion rising costs, chokes investments and exerts a downward pressure on industrial production,” the chamber said in a statement.

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