Market anxiously awaits RBI credit policy

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{image-inflation+rbi_27042008.jpg}Mumbai, Apr 27: Industry, trade and financial market is waiting with bated breath the Tuesday's annual credit policy of Reserve Bank of India (RBI) amidst the country reeling under inflationary trends at around 7.33 per cent and high growth of above eight per cent taking a severe hit.

With the Government amply making it clear that the priority was to contain inflation rather than sustain a high growth, the RBI was expected to announce some measures to douse the inflationary trends and lower its indication of anticipated growth rate for the current fiscal. RBI Governor Y V Redddy had already termed the above seven per cent inflationary rates on a year-on-year basis as against the RBI's target of five per cent as ''unacceptable''.

The prevailing banking rates were: CRR 7.75 per cent, SLR 25 per cent, Bank Rate six per cent, Repo Rate 7.75, reverse repo six per cent, Prime lending rate 12.75 to 13.25 per cent, savings rate 3.5 per cent, deposit rates 7.5 to 9.6 per cent.

The Central Bank had already taken the sting out of the annual policy statement, when it on April 17 hiked the Cash Reserve Ratio (CRR) by 50 basis points in two phases with the first dose of 25 basis points effected on April 26 to raise CRR to 7.75 per cent.

The second dose of 25 basis points would take the CRR to eight per cent from May five. The RBI, taking cue from Union Finance Minister P Chidambaram's statement in Parliament on the need for the Apex bank to take corrective measures to check the galloping inflation, came out with the CRR hike, bare two weeks ahead of its annual credit review meeting on April 29.

The trade and Industry have already come out strongly against any further hike in the RBI rates stating that it would stunt the growth. Federation of Indian Chambers of Commerce and Industry (FICCI) seeking a status quo had said that inflationary trends were mainly due to supply strain constraints and global commodity price increase and any change in RBI rates would only further impact the industry.

Any change northward would have a cascading impact on the economy, it felt.

Both banking experts and industry leaders accept that the current high inflationary phenomenon was only a passing phase and the government or RBI should not do anything harmful in this phase that would arrest on bright long term growth trends.

State Bank of India Chairman O P Bhatt indicated the possibility of the Apex bank not hiking the rates further, though some foreign investment banks, including the Lehman brothers did not rule out the possibility of 25 basis points increase in the Repo rates. Mr Bhatt felt, with the large industrial and business houses already chalking out a long term map looking out over the next five to ten years, the pressure would be on other Companies. But he was assertive when he said that there might not be any further changes in the rates.

Reports have also indicated that RBI in its policy statement introduce certain measures selective credit control measures to check inflation. The controls could be through tightening of credit to certain sectors which fuel inflation. It would not be the first time such mechanisms were put in place as they had been used earlier by the RBI in 1980s.

Among the options available to the RBI Governor included status quo that would not take the lending rates upward and benefit the industries but would not check inflationary trends, raising repo rate and keep other rates unchanged: this might lead to banks increasing lending rates, but decelerate growth rates, raising repo rate and reverse repo rate and keep other rates unchanged as it could help dampen price pressures by curbing borrowings and encourage savings.

The RBI could raise reverse repo rate but keep other rates unchanged with the measure reduce the volatility in inter-bank cash rates and keep them in a slightly higher position. It could also lead to banks hiking lending rates.


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