Rates may soften on low inflation

Finance Minister P Chidambaram said today "inflation was tolerable and interest rates could moderate if inflation expectations were dampened." Latest inflation data shows a 0.28-per cent decline to 4.68 per cent for the week ended July 8.

Chidambaram said there was no justification for heightened inflationary expectations. "Rising oil prices will have an impact. There is some uncertainty, but it will get removed in a few weeks. Prices will not rise or rise relentlessly," he said, adding that "if inflation remains moderate, interest rates will also remain moderate."

The Reserve Bank of India (RBI) is expected to raise interest rates by another 25 basis points to 6 per cent. (New agency reports said Chidambaram's comments sparked off a rally in the bond market, with the yield on the benchmark 10-year government bond down 7 basis points on the day to 8.24 per cent.)

The finance minister reiterated that the government and the RBI would take all steps to control inflation. He added that there was ample liquidity in the banking system.

"The RBI is absorbing large amounts. Despite ample liquidity, there is a rise in interest rates, it is because of inflationary expectations," he added.

The overall subscription to the RBI's liquidity adjustment facility "" reverse repo "" has increased to Rs 54,305 crore as on July 11.