Key interest rates will remain unchanged: RBI

Mumbai, Oct 31: The Reserve Bank of India today said that key interest rates will remain unchanged in order to maintain stable commercial lending rates, including that of home loans, to keep the growth momentum alive.

Presenting the mid-term review of the annual policy for 2006-07, the RBI Governor Y V Reddy says that to contain inflation, now hovering at over 5 per cent, it will hike the repo rate (overnight rate), at which RBI buys securities from banks to 7.25 per cent from the earlier 7 per cent.

In it's mid-term review of the annual policy statement for FY'07, the RBI kept both the bank rate and cash reserve ratio unchanged at 6 per cent and 5 per cent, respectively. Normally, the reverse repo and repo rates maintain a 100 basis points spread between each other which has now been increased to 125 basis points.

Further, the apex bank has retained the flexibility to conduct overnight repo or longer term repo including the right to accept or reject tenders under the LAF, wholly or partially.

In its overall assessment, RBI maintains that while global growth has been strong and broad-based, there are some indications of moderation like the cooling of the US housing market and the potential drainage of liquidity from financial markets. While global inflation conditions have not worsened, potential price pressures persist in the wake of the firming up of food and metal prices, the uncertainty surrounding international crude prices and the monetary overhang. While geopolitical risks continue to cast a shadow, it is necessary to recognise that global risks have not changed significantly from the time of the First Quarter Review of July, 2006.

On the domestic front, there is a pick-up in the momentum of growth which also appears to be spreading across all constituent sectors. Financial markets have exhibited stable and orderly conditions. The current account deficit has been well-managed so far.

There are indications of growing demand pressures and potential risks from rapid credit growth, strains on credit quality and elevated asset prices. High levels of monetary expansion and the evolution of the liquidity situation need to be continuously monitored for any signs of risks to inflation.

At the current juncture, for policy purposes, the two major issues that exert conflicting pulls are exploration of signs of overheating firming up to warrant a policy response, and, the impact of lagged effects of earlier policy action on the evolution of macroeconomic developments.

Commenting on the stance of Monetary Policy, RBI noted that the GDP growth is forecast to be at around 8.0 per cent during 2006-07 as against 7.5-8.0 per cent projected in the Annual Policy Statement and the First Quarter Review. Containing the Y-o-Y(year on year) inflation rate for 2006-07 in the range of 5.0-5.5 per cent assumes policy priority in terms of watchful monitoring and appropriate policy responses.

The growth in monetary and credit aggregates is expected to be higher than the initial indicative projections. It is, however, important to reiterate the concerns expressed in the First Quarter Review and take careful note of the higher expansion in money supply, deposits and credit while assessing liquidity conditions.

The increasing importance of global factors, by itself, would not warrant any change in the policy stance at this stage, though the evolving monetary policy actions of major economies need to be watched.

In the domestic economy, there are signs of demand pressures in addition to possible transient supply constraints in respect of primary commodities. The Reserve Bank will ensure that appropriate liquidity is maintained in the system so that all legitimate requirements of credit are met, particularly for productive purposes, consistent with the objective of price and financial stability.

Towards this end, the Reserve Bank will continue with its policy of active demand management of liquidity through open market operations (OMO) including the MSS, LAF and CRR, and using all the policy instruments at its disposal flexibly, as and when the situation warrants.

Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy in the period ahead will be to to ensure a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum while reinforcing price stability with a view to anchoring inflation expectations. Besides, it would be to maintain the emphasis on macroeconomic and, in particular, financial stability and consider promptly all possible measures as appropriate to the evolving global and domestic situation.

UNI