RBI signals firmer interest rate regime

The fat lady hasn’t sung, but the signal has got through loud and clear. While India Inc is relieved that the RBI has kept the Bank Rat...

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The fat lady hasn’t sung, but the signal has got through loud and clear. While India Inc is relieved that the RBI has kept the Bank Rate unchanged, the marginal repo rate hike shows the apex bank has sent strong indicators that interest rates will go up in a calibrated manner in the future.

On a future hike in interest rates, RBI governor Dr Y V Reddy said that “it will consider in a calibrated manner, in response to evolving circumstances with a view to stabilising inflationary expectations.”

The central bank made it clear it would pursue an interest rate environment that is conducive to macro-economic growth and price stability and maintaining the momentum of growth. “While RBI will continue to pursue stability, the markets should be prepared for uncertainties,” the mid-term review said.

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Reddy said the era of surplus liquidity is over. The overall stance of monetary policy for 2004-05 would be provision of appropriate liquidity to meet credit growth and support investment and export demand in economy while placing equal emphasis on price stability.

The apex bank pointed out that high oil prices will be a spoilsport as far as growth prospects are concerned. “Growth in GDP is likely to be less than originally projected mainly due to deficient monsoon conditions and partly due to high and volative oil prices, despite a better than anticipated outlook for manufacturing industry and export demand,” the RBI said.

Issuing a note of caution on high oil prices putting pressure on inflation, RBI raised inflation estimates for the current fiscal by 150 basis points to 6.5 per cent on account of rising crude oil prices. The governor, however, pointed out that the impact of higher international prices so far has been partly cushioned by fiscal measuers such as excise and customs duties cuts.

He also said that the consumer price index inflation has been lower than the WPI inflation in the recent past, reflecting the difference in coverage and lower increase in prices of food items.

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In retrospect, the magnitude and persistence of supply shocks was beyond what was anticipated by many. While there are uncertainties regarding the future course of international commodity prices, particularly oil prices, it is now clear that the year-end inflation projection would exceed what was anticipated at the begining of the financial year (five per cent), he said.