Minor increase in key RBI rates, but banks not to raise them yet
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These include the repo rate (which banks pay to borrow from the RBI) and reverse repo (which the RBI pays banks for parking funds with it), as well as the cash reserve ratio (money impounded by the RBI).
The nation’s central bank has also been soft on the realty sector even though there are clear indications of a pricing bubble building up across the country — from Mumbai to Gurgaon. A 450 sq ft one-bedroom flat now costs Rs 1 crore in South Mumbai. Asked about this, RBI governor D. Subbarao said commercial credit for real estate has come down since the provisioning measures put in place in October, and that there was no need for any adjustment at present.
However, this low rate regime is not likely to last very long. Dr Subbarao says the RBI has kept open the option to raise rates midway. It had done this in March, just five weeks before the credit policy announcement was due. One analyst said that the banks could wait till July 1, when all banks have to switch to the new base rate system, before finalising their interest rate lending regime. The stock markets welcomed the RBI’s policy, and the market shot up by over 35-40 points, but by the end of the trading day it had pared its gains and closed almost flat.
Asked why he had kept the rates so low, Dr Subbarao said that had inflation not spilled over from food to the non-food manufacturing sector, he might not have had to resort to even the quarter per cent hike in policy rates. Inflation in manufactured products which affects the consumer has increased from minus four per cent in November 2009 to 4.7 per cent in March 2010.
The RBI pegged the inflation rate at 5.5 per cent for the end of March 2011, and GDP growth at eight per cent, with an upward bias for the year. This is predicated on a normal monsoon and the continued good performance of industry and the services sector.
But people should not be misled into thinking that the fires of inflation have been completely doused in the short term — even if from July the low base factor will not longer be there. The reasons for this are that prospects for the monsoon are still not clear, crude prices continue to be volatile and commodity prices could rise if there is a surge in growth in the developed economies. Added to this, growth in India means demand side pressures are building up. If the monsoon is not normal, it could affect rural consumer sentiment and worsen the food inflation.
The RBI chief said the liquidity position would be managed in a way that would meet the growth for credit, pegged at 20 per cent, and also the government’s borrowing programme. The deposits of scheduled banks are expected to grow by 18 per cent.
The banks had just one grouse with the Reserve Bank: that is the financing of infrastructure. They feel that there is a need to develop alternative sources for financing and supplementing the efforts of the banking sector. The measures announced by the RBI in its monetary policy are all concentrated on facilitating banks to fund infrastructure.
Olga Tellis
