Commenting on the 25 basis points hike in repo and reverse repo rates by the Reserve Bank in the Credit Policy Review today, Sanjay Bhandarkar, MD & head of investment banking, Rothschild India, said: The Reserve Bank of India's monetary tightening today is a pre-emptive measure aimed at checking excessive growth in credit and rising prices. The economy is growing at a very healthy pace for a fourth straight year and the demand for credit is clearly very robust, across sectors. While India's economic fundamentals are strong in terms of rising productivity and strong demand from home and abroad for goods and services, there is a need to check excessive enthusiasm to borrow, spend or invest. Unfortunately the central bank's mandate is to temper the enthusiasm at critical times. A build up of excess capacity and over reliance on debt will only come to haunt the economy at a later stage.The tightening will also help check the demand-pull part of the current price spiral. To the extent a large part of domestic inflation is being fed by the global spiral in commodity prices--and especially of crude prices-monetary policy can't do much, but some moderation in the growth impulses will certainly slow down the India component of the rising globaldemand for such commodities. Thus, in a roundabout way, this could lead to much more stable growth impulses in the medium term. In fact, the Chinese authorities are also doing their bit to contain the domestic growth rate, Bhandarkar said.Growth, however, is unlikely to be impacted at this point in a significant way. It is not like the economy will shudder and sputter, though critics will quote the dovish stance of the US Fed to yell wolf just because of a 25 basis point hike. Domestic growth in the past two years is being driven by investment spending, and is likely to remain so in the near term. Thiscomponent is less sensitive to interest rate trends than say consumer spending. So the Fed's stance is justified in light of their economic circumstance, as a hike is justified in the Indian case, Bhandarkar said.
