Yes Bank The Reserve Bank of India's (RBI) annual policy statement comes in the backdrop of high oil prices, unprecedented growth in non-farm credit and a massive Government borrowing program.
However, economic conditions continue to remain strong with robust growth in manufacturing and services and hence by hiking the reverse repo rate to 5 per cent , the RBI has responded well to curtail supply side inflationary pressures.
Overhanging concerns on inflation persist, despite the WPI inflation rate having decelerated to 5.48 per cent from a peak of 8.70 per cent in August 2004.
However, at the current level, inflation appears to be muted and has been cushioned from the high base of last year.
We believe the inflation projection 5- 5.5 per cent is a fairly realistic estimate by the RBI given that demand side pressures are being responded well by increased capacity utilisation and new capital formation.
There may be a floating opinion that the hike in reverse repo rate is a somewhat premature , but we believe it will significantly facilitate mitigating uncertainty on higher interest out of the markets.
While the government's high borrowing program and the accelerated growth in non-farm credit will put pressure on liquidity, the RBI is in a position to infuse adequate liquidity through unwinding of the MSS as it has stated in the policy.
This will ease pressure on liquidity demands. Globally, the impact of persistently higher energy prices is likely to lead to a slow down in GDP growth in the US.
However, US interest rates are still trending higher and the Fed fund futures see the Fed target rate at 4 per cent by December 05.
With the Indian economy getting increasingly integrated with the global economy, there is no denying the fact that worldwide interest rate pressures are building up and the RBI has done well to move in tandem with the global economy.
Retail customers do not have reason to worry about interest rates on Home, Car and Educational loans.
We saw these rates bottoming out about 2 years back after which we have seen some amount of marginal upward revision. These rates have stabilised now and are likely to stay steady in the near term.
Hence, it is fair to say that on the back of steady credit rates, the economy will continue to grow at its imposing current pace.
