AIG India The Reserve Bank of India (RBI) has had to tread the fine line between fighting inflationary pressures and keeping interest rates attractive enough to encourage credit offtake.
While all other rates have been left unchanged the hike in reverse repo rates resulted in a rise in yields across the curve. Importantly the RBI has also noted that the interest rate cycle has reversed.
A prime reason for raising the reverse repo rate is inflationary concerns. While inflationary pressures are on account of rising oil prices and are therefore supply side driven, the RBI has chosen to hike repo rates as a proactive measure.
The magnitude of the raise is low and is unlikely to affect credit offtake while at the same time cautioning market participants Overall the stance of monetary policy remains similar to the announcements in October with a thrust on providing adequate liquidity to support credit growth and at the same time maintain price stability.
A noteable point is RBI's belief that the structural acceleration of economic growth is built on strong foundations, which should help the economy reduce its dependence on monsoon and the agricultural sector.
Capacity expansion in the manufacturing sector can lead to a virtuous cycle of economic growth, employment generation and output increase.
It is on account of this cyclical growth in investments that the RBI is not too concerned about the current account deficit, since a large part of the deficit is being caused by a rise in imports supporting industrial growth.
The growth in the manufacturing and services sectors is causing a sharp rise in commercial credit offtake and RBI's policy stance is directed towards ensuring that there is adequate liquidity for both commercial credit and government borrowing.
Rising crude prices has led to strong inflationary pressures. Thus inflation is likely to be a key parameter for the conduct of monetary policy over the coming months.
On the structural front the RBI has made taken some important initiatives. These include measures to set up an independent Banking Codes and Standards Board to ensure a comprehensive code of conduct for the fair treatment of customers.
RBI has also encouraged banks to conduct an internal review for ensuring compliance with Basel II risk management norms.
On the issue of fiscal management the RBI has emphasised the need to pursue fiscal consolidation to realize the long term potential of the economy.
