JOIN USThe hiking of key rates by the Reserve Bank of India as part of its first quarter review of credit policy has not come as a surprise. The central bank has been taking an increasingly hawkish policy stance ever since inflation has gone beyond acceptable limits. It has made it clear that the rising inflation rate remains its major concern and all monetary tools have to be used to contain it. It has therefore increased the repo rate, the rate at which banks borrow from it, by 25 basis points and the reverse repo rate, the rate at which it borrows money from the banks, by 50 basis points. The reduction of the gap between the two repo rates will help to protect the short term interest rates from major fluctuations. The banks would otherwise have found it difficult, especially because there has been a major outflow of credit in the recent past. The cash reserve ratio (CRR) has been left untouched in view of the demand for liquidity.
The measures did not cause any shock in the market since they were expected. The RBI has declared that it would keep its sights on inflation which it expects to be at 6 per cent — higher than its earlier estimate of 5.5 per cent — at the end of the year. It has revised its growth expectations also from 8 to 8. 5 per cent. The challenge, not only for the monetary policy but for the wider policy stance, is to strike a balance by keeping inflation low without hurting growth prospects. Some factors which have a bearing on the situation are beyond the central bank’s control too. It hopes for a good monsoon, which will moderate domestic prices, and a fall in oil and commodity prices as result of the slow pace of global growth. But domestic demand is set to rise on account of steady economic growth. Though in the short term the RBI’s policy prescriptions might be weighted in favour of fighting inflation, they will ultimately be conducive to creating a more stable environment for growth.
The RBI has also taken a good decision to increase the frequency of its monetary reviews from one in each quarter to another four in between, so that there are eight in a year. This will make its policy interventions more gradual and remove the scope for disruptions in the market through sudden rate changes.