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Monetary policy to remain tight: Report

Written by: Staff
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New Delhi, Sep 10 (UNI) A persistent increase in global oil prices as well as domestic inflation, which crossed the five per cent mark to 5.01 per cent for the week ended August 26, will continue to further tighten the monetary policy of the Reserve Bank of India.

These trends as well as signals from credit and money supply growth in the coming months might provide crucial inputs to RBI's policy decisions going forward, a report said.

The central bank's monetary policy which is a combination of various factors including global cues on interest rates, inflation and oil prices, do effect the trade or capital flows into India, besides domestic inflation.

The 25 basis point hike in reverse repo rate in the recent quarterly review, as well as medium term signalling measures like the Bank rate and the Cash Reserve Ratio (CRR) rate remaining unchange, however, suggest that the RBI continues to take a pre-emptive stance to contain inflationary pressures, while trying to maintain a conducive environment for growth, the report added.

Previous interest rate hikes, which lead to the tightening of the monetary policy, have not significantly impacted either the credit offtake or growth trends, in a probable relief to the bank.

However, though the decision on interest rates was something that was expected by the bond markets, the policy statement, with its specific warnings on inflation and credit numbers, was unexpected and suggests a negative bias to the policy in the coming months.

Credit growth numbers showed a 32.9 per cent increase in the April-June period, which is well ahead of the targetted 20 per cent expasion for this fiscal, prompting the RBI to express concerns, stating that this warranted ''closer policy attention'' in the coming months.

Global rate signals have been a key influence on the domestic monetary policy. While on the one hand cues from Asia and Europe continue to point towards tightening, China, on the other hand, is attempting to cool its economy by raising reserve requirements for banks with Japan ending its zero rate policy.

Bank of England has already increased its rates, while declining economic growth in the US has weakened expectations of further tightening.

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