The Reserve Bank of India (RBI) will not tinker with policy rates unless absolutely necessary, Deputy Governor K C Chakrabarty has said.
“That does not mean we don’t have the right to change rates any time,” he said on the sidelines of an event organised by Bank of India.
Chakrabarty indicated that monetary policy should be responsive to evolving global and domestic developments. It is real-time policy that is needed when action has to be taken, he said.
In a bid to curb inflationary pressures over the past two months, the central bank has increased the repo rate, or the rate at which it lends overnight funds to banks, and the reverse repo rate, the rate it pays to mop up surplus funds available with banks, by 50 basis points each.
Analysts had expected that the central bank might opt for a mid-policy rate hike after it raised policy rates by only 25 basis points when the Annual Policy Statement was released in late April. But in light of the problems in Europe, the possibility of an immediate monetary policy action is limited.
“We have taken off our 25 bps (basis points) inter-meeting June rate hike. In our view, RBI will likely want to wait until the end-July policy meeting to assess the impact of the European crisis on global growth,” Bank of America Merrill Lynch India Economist Indranil Sen Gupta said in a report.
The central bank has, however, expressed its concern over inflation, which at 9.59 per cent in April is way above its comfort level of 5-5.5 per cent. On Tuesday, Governor Subbarao said RBI would consider global developments along with domestic data while formulating the monetary policy.
Though RBI may not resort to a hike before the end of July, when the monetary policy review is slated, economists believe that policy rates could increase by 250-300 basis points this year as the central bank tries to tame inflation.
“The Reserve Bank of India will be watching the core inflation rate very closely and may raise (policy) rates if it accelerates,” India’s Chief Statistician Pronab Sen said yesterday.
“With demand remaining strong, we think core inflation will likely remain elevated through FY11, and maintain our above-consensus inflation forecast of 7.5 per cent. This will prompt further action by the Reserve Bank of India to withdraw accommodation. We persist with our view that effective policy rates may rise by 300 bps in 2010. Indeed, effective short-term policy rates have risen by some 200 bps year-to-date, with recent liquidity tightening playing a large role,” Goldman Sachs’ Tushar Poddar said in a note on Thursday.
