The Reserve Bank of India (RBI), on Monday, said inflation has been “contained” by interest rate increases and import duty cuts the past three years, signaling there may not be any immediate need to raise borrowing costs further.
“Pre-emptive monetary measures since mid-2004 accompanied by fiscal and supply-side measures have helped in containing inflation,” RBI said in a report on the economy ahead of its quarterly monetary policy on Tuesday.
According to RBI movements in capital flows and government cash balances continued to influence cash conditions in the banking system and foreign investment flows remained buoyant.
Major driver
RBI said pre-emptive monetary and fiscal measures over the past three years have helped contain inflation but manufactured prices continued to be a major driver.
“Capital flows and swings in cash balances of the governments were the main drivers of liquidity conditions in the financial markets, imparting volatility to overnight interest rates,” RBI said in its report on macroeconomic and monetary developments in the April-June quarter.
RBI Governor Y V Reddy will probably leave the overnight lending rate unchanged at 7.75 per cent, according to all 19 analysts in a Bloomberg News survey as also Reuters poll analysts.
Inflation has stayed below Mr Reddy’s 5 per cent target since May. Likewise, call money rates have stayed near zero for three weeks as the central bank stepped up dollar purchases to prevent the local currency from advancing further from a nine-year high. Additions to foreign-currency reserves rose $8.7 billion this month after a $5.1 billion increase in June. Dollar purchases in March and April were $2.3 billion and $2.1 billion respectively.
The drop in the call rate was also fueled after RBI on March 2 capped at Rs 300 crore, the amount of money it will absorb each day from lenders through its reverse-repurchase auctions.
Domestic liquidity
“In recent period, there have been sharp variations in domestic liquidity conditions and overnight interest rates on the back of large movements in government cash balances and capital flows,” RBI said. “Reduction in government cash balances and increase in capital inflows lead to an increase in market liquidity and downward pressures on overnight interest rates.”
The benchmark wholesale price inflation rate, which reached a two-year high of 6.7 per cent in January, has eased after RBI increased its repurchase rate six times in the past 18 months. In the week ended July 14, it was 4.41 per cent.  Loans to consumers and companies grew 24.3 per cent in the year to July 6 compared with a 31 per cent gain in the same period last year, RBI said.