Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty on Tuesday hinted the central bank might not hike the cash reserve ratio (CRR), as such an increase would pose “extreme difficulties” for banks.
“The money goes to government and RBI. So long as the government does not spend that money, or RBI does not release the money, it is anti-inflationary,” he said.
Banks have been net borrowers of Rs 20,000-30,000 crore from RBI’s daily liquidity adjustment facility tender since the last two months.
Chakrabarty also pointed out that banks’ deposit growth is not picking up. According to latest RBI data, banks’ deposits grew 14.93 per cent year-on-year in the fortnight ended July 2.
However, Chakrabarty refrained from commenting on the extent of rate hikes RBI may affect in its policy review on July 27. Most market participants expect RBI to hike reverse repo and repo rates by at least 25 basis points and leave CRR unchanged. The reverse repo rate currently stands at four per cent, while the repo rate is 5.5 per cent.
‘RBI will need to take monetary steps’
RBI would need to take monetary steps if it found that the current inflation rate was high due to increased money supply, Cabinet Secretary K M Chandrasekhar said on Tuesday.
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“A call will have to be taken by RBI whether inflation is on account of high money supply or is it on account of sectoral reasons, some supply constraints. If it is on account of liquidity being much greater then obviously, there is a call for more monetary measures,” he told reporters.
“I don’t know how RBI will react. But they will be constantly watching and they will be taking measures as they go along,” he said.
India’s headline inflation rate, which has been in double-digits for the last five months, rose to 10.55 per cent in June from 10.16 per cent in the previous month.
As on July 2, India’s money supply was up 15.3 per cent on year as against the central bank’s target of 17 per cent for the year. Chandrasekhar, who was addressing a press conference along with other top bureaucrats after a seminar on ‘India’s growth prospects’, said RBI is adopting a very considerate approach on interest rates.
“RBI is adopting a very, very considerate approach. I cannot say whether it is enough or not,” he said. Recoiling from its easy policy stance, the central bank has raised repo and reverse repo rates by 75 basis points (bps) each and CRR by 100 bps over the last six months to curb inflationary pressures.
Analysts expect RBI to raise key policy rates again next Tuesday.
Inflation, growth
The cabinet secretary said normal monsoon rains and a high base effect will temper inflation in the coming months.
The headline inflation rate was likely to ease to five-six per cent by the end of this year, Chandrasekhar said.
“The actual situation is that over the past three to four months, we have been able to maintain prices at stable levels... I don’t think we are going to live in high inflation environment... base effect also has a role to play,” he said.
“We are expecting, by all accounts, a normal or even good monsoon... One major factor (for high inflation) was food price, I think with a good monsoon and much higher productivity, inflation will decrease,” he said.
India Meteorological Department has projected the southwest monsoon at 102% of the long period average. However, rains have so far been poor. With over one-and-a-half months of the four-month monsoon season gone, overall rainfall was only 84% of average as on Monday.
On India’s growth prospects, Chandrasekhar said the current economic environment is favourable for moving to a higher growth momentum.
“I don’t think there is anything in our way in achieving 10% growth.”
India, among nations posting the fastest recovery from the global slowdown, is likely to grow at 8.5% in the current financial year, he said. In the midst of the global slowdown, the country grew at 6.7% in 2008-09, 7.4% in 2009-10, as against an average of around 9.5% in the preceding three years.
The cabinet secretary also said government is unlikely to completely withdraw fiscal stimulus as of now. Over the past two years, the government had announced a number of steps, including duty cuts, to boost economic growth. With growth picking up, it has gradually started the process of stimulus exit by partly reversing excise duty cuts in the Budget for 2010-11.
On the government’s financial health, the cabinet secretary said, its fiscal deficit in 2010-11 is likely to be lower than the budgeted 5.5% of gross domestic product on account of good non-tax revenues. The government raised about 1.06 trln rupees from auction of 3G and broadband airwaves, compared with the Budget projection of 350 bln rupees.