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Mint Road may raise repo rate through credit policy

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Anindita Dey Mumbai
Last Updated : Feb 06 2013 | 5:00 PM IST
The Reserve Bank of India (RBI) is understood to be mulling over a repo rate hike of 25-50 basis points in the forthcoming 'annual' policy announcement in the last week of October.
 
According to banking sources, the hike is considered part of a monetary measure to raise the real rate of interest, which has turned negative owing to high inflation.
 
The flare-up in crude oil prices is the major reason for the rise in inflationary pressure. While oil prices are ruling at above $51 per barrel, its all time high, domestic inflation rate stood at 7.80 per cent in the week ended September 24.
 
The inflation rate has surged from 4.32 per cent in late April and is hovering between 7-8 per cent for nine weeks now, fuelled by oil.
 
While bank deposits rule in the range for 4-5.5 per cent, the yield on ten-year benchmark 7.37 per cent gilt stands around 6.50 per cent.
 
The only high interest rate offering savings instrument yesterday are the 8 per cent taxable bonds (effective yield is less after taxation), the 9 per cent senior citizen schemes and the employees provident fund at 8.5 per cent. Sources added that a repo rate will help the banks to realign the interest rates in the short and medium term as credit offtake picks up.
 
For the financial year 2004-05 so far, non-food credit has grown by Rs 66,759 crore as against Rs 12,495 crore last year, according to data released in the weekly statistical supplement of RBI last Saturday.
 
Even though finance minister P Chidambaram has said that the central bank should not tighten monetary policy, central banks across the globe have already raised interest rates. Globally, rates are on a high and economic recovery is gradually spreading. The ten year US yield has move up to 4.18 per cent, compared with 3.96 per cent few months back.
 
Sources added that with declining outstanding liquidity in the system, demand-side pressure is building up as well. Till a few weeks back, prior to the hike in the cash reserve ratio (CRR), rising inflation was considered to be a supply-side phenomenon.
 
On account of the CRR hike, consistent rise in credit pick up and government borrowing programme, the outstanding liquidity in the system has come down to Rs 8,000 crore from Rs 30,000-35,000 crore a few weeks back.
 
While the overhang of liquidity seems to be easing, more than 50 per cent of the government borrowing is left to be done in the second half of the fiscal.

 
 

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First Published: Oct 07 2004 | 12:00 AM IST

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