RBI raises key rates; FM: may impact short-term growth

Hardening its stance on inflation, RBI Tuesday raised some key policy rates prompting finance minister Pranab Mukherjee to caution that it could have some short-term negative impact on growth.

The apex bank increased its short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points to 6.25 percent and 5.25 percent respectively, but the commercial banks said they would not increase their lending rates immediately.

"This tightening may have some negative impact on the growth rate, but I expect such an effect to be only a short one. In the medium to long term, the changes announced by the RBI today should actually help the Indian economy do better in terms of growth," Mukherjee said.

This was the sixth time this year that the Reserve Bank of India (RBI) has raised repo and reverse repo rates. The apex bank, however, hoped that going forward it may not have to up the rates further.

India Inc expressed apprehensions that the RBI decision would make loans expensive and may dampen industrial growth.

"This (RBI move) in turn would adversely impact the interest sensitive sectors like consumer durables and auto, which have led the growth hitherto as also on the housing demand," Ficci secretary feneral Amit Mitra said.

RBI has pegged the growth rate for the current fiscal at 8.5 percent, up from 7.4 percent in the previous fiscal.

The mid-year policy initiatives, according to Planning Commission deputy chairman Montek Singh Ahluwalia, were in sync with the actions of other central banks.

Although banks said they would refrain from immediately hiking rates, they may not be able to hold on to the existing rate-level for long as demand for credit increases and depositors put pressure on them to raise interest rates.

"So, whether it (hike by RBI) will raise pressure on the system? Eventually, it will. Whether there would be immediate reaction? Not likely," said SBI chairman O P Bhatt.

The hike in the key interest rates according to RBI is aimed at containing inflation, which is above the "comfort level."

Inflation was 8.62 percent in September and food inflation was 13.75 percent in mid-October. RBI has pegged inflation at 5.5 percent by the fiscal- end.

"Today is not such an easy time. The signals from the economy have been mixed. Industrial growth showed a slight slowing down in August. Inflation, while less than what it was some months ago, is still not in a zone where we can sit back," Mukherjee added.

RBI, however, refrained from raising the cash reserve ratio (CRR), which is the proportion of deposits that the banks keep with the central bank, in view of tight liquidity situation.

"I am glad that RBI has risen to the challenge and used a very careful combination of policies to complement what the government is doing to steer our economy to grow better and harness inflation," Mukherjee said.

Stock markets reacted mildly to the hike in policy rates by RBI with the benchmark Sensex ending the day flat. The 30-share index closed 9.94 points lower at 20,345.69 points.

"RBI's move to hike the key policy rates are in line with the Street's expectations and equity markets have not reacted much to the announcement since it has already be factored in," Axis Mutual Fund CEO and MD Rajiv Anand said.

Expressing concern at excessive borrowing for homes, the Reserve Bank also tightened norms for housing loans as well as controversial teaser loans.

The Reserve Bank also cautioned against rising stock and gold prices.

It said huge capital inflows in emerging economies are resulting in appreciation of local currencies and asset prices.

The central bank said it may intervene if forex flows are lumpy and volatile.

Loans may get costlier, deposits attractive as RBI hikes rates

Home, auto and corporate loans are likely to become expensive, with the RBI on Thursday raising key short-term lending and borrowing rates by 0.25 and 0.50 percentage points, respectively, to combat inflation.

In its maiden mid-quarterly monetary policy review, the central bank upped repo, under which it lends short-term funds to banks, to six percent and reverse repo, the short-term borrowing mechanism, to five percent.

The hike in the policy rates, the fifth this year, to cool inflation that is hovering at 8.5 percent may lead to an increase in commercial lending and deposit rates.

"In early October, interest rates could be revised and chances are there it could be revised upwards," state-run Bank of Baroda's Executive Director R K Bakshi said.

Bankers said they will hold on to the rates till September 30, which is the half yearly closing of the banks.

High interest rates could temper demand for loans and thus curtail consumption, while on the other hand fixed deposits could earn better returns.

The government expects inflation to cool to six percent by December.

"Rate of interest may have to go up. Pressure is there to increase rates in the near term," Bank of Maharashtra CMD Allen Pereira said.

Short-term funds would get little costlier and there is possibility that the short-term (deposit) rates could also go up in the future, bankers said.

Central Bank of India CMD S Sridhar said, "Bankers will adopt a calibrated approach. The examination of interest rates is on cards as cost of funds for banks is increasing."

However, a few bankers ruled out increase from October 1 as they will wait for further policy action of RBI.
"EMIs are not going to go up from October 1. The quarter percentage increase in policy rates were expected. Further rate hikes by bank will depend on the next policy review," HDFC Chief Executive Keki Mistry said.

He said a further increase in rate in the second quarter review in November could lead to higher rates.

Following an identical hike in repo and reverse repo rates in July, 40 banks raised deposit rates and 29 lending rates.

The RBI too wants deposit rates to go up as there is a need to make the real interest rates, the difference between inflation and deposit rate, positive. "...real interest rates need to move in the direction of encouraging bank deposits", the central bank said.

Industry chamber FICCI also expressed the fear that rising interest rates would hit business.

"Increasing repo rate is another signal of rising the cost of borrowing...hopefully it is the last such...restrictive action towards growth. We hope to see this restrictive policy eased in the next round", said FICCI secretary general Amit Mitra.

Expressing concern over the RBI move, PHD Chamber said, "This will adversely impact the cost of borrowing by the industry from the banks, especially by the SMEs. It may also the cost of home loan as well as consumer loans."

For RBI the major concern in inflation as "headline inflation remains significantly above the trend of 5.0-5.5 percent in the 2000s.

"I think it (the RBI move) is in the right direction because now the corridor (difference between repo and reverse repo) has been narrowed down and still inflationary pressure is there in the system," Finance Minister Pranab Mukherjee told reporters here.

The 100 basis points gap between repo and reverse repo marks the return to the pre global financial meltdown level.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said: "This (hike) is in the right direction and on the expected lines. This is not going to affect the economic growth."

Government data last month showed that the economy grew by an impressive 8.8 percent in the April-June quarter, driven by a robust manufacturing sector.

However, the central bank wondered if the industrial expansion data was reflecting the reality.

"Although the year-on-year growth rate for the first four months of the year remains robust at 11.4 per cent, the high volatility over the past two months raises some doubts about how effectively the index reflects the underlying momentum in the industrial sector," RBI said.

The data on the Index of Industrial Production (IIP) showed that industrial growth accelerated to 13.8 per cent in July from 7.2 per cent a year ago, belying all expectations of slowdown.

RBI described the data as volatile since the previous month it was just 7.1 percent, which was further revised down to 5.6 percent, analysts said.

The comments by RBI also assume importance, since the Government itself committed a blunder while computing GDP data from the demand side, and revised it by around three times, a day after.

RBI may raise key rates tomorrow to tame inflation: Experts

RBI is likely to raise policy rates by up to 25 basis points in its mid quarterly policy review Thursday to tame inflation, which is still ruling near the double-digit mark, said experts.

Inflation, as per the revised index was 8.51 percent in August, although it was 9.5 percent according to the old index.

Even finance minister Pranab Mukherjee, while responding to decline in inflation, which under the new series fell by 1.3 percentage points during August, had said, "there is no room for complacency... we must continue to be vigilant and be prepared with the instruments of fiscal and monetary policy to use them as and when the need arises."

Citigroup said in its research report said, "given trends in both macro and sectoral data, coupled with the RBI saying that policy rates are still far from a normal position, we expect the RBI to raise both repo and reverse-repo rates by 25 bps in its review on September 16."

The government, Tuesday, came out with a new wholesale price index series that measured inflation in August at 8.5 percent based on 2004-05 prices.

Although the August figure is lower than that of July which was at 9.8 percent, experts believe the supply and demand side pressures still remain and RBI should hike its short-term lending (repo) and borrowing (reverse-repo) rate to control money flow.

RBI deputy governor Subir Gokarn also expressed concern, saying "the inflation rates that the economy is now experiencing, both from the supply and the demand sides, are clearly a matter of great concern. It is incumbent on the government and the central bank to use all the means at their disposal to rein inflation."

This is the first time that the Reserve Bank is coming out with a mid-quarter economic policy review.

"The RBI will go in for a rate hike as robust growth in industrial output and healthy economic growth would give the RBI enough cushion to make money expensive," Deloitte Principal Economist Shanto Ghosh said.

The RBI has raised interest rates four times this year, upping key policy rates by 100 basis points as it tries to combat high inflation in Asia's third-largest economy.

In its first quarter monetary review in July, the central bank had raised short-term lending and borrowing rates by 0.25 percent and 0.50 percent, respectively.

Following the increase, the repo rate stands at 5.75 percent and the reverse repo rate at 4.50 percent.

India's GDP grew by 8.8 percent in the first quarter, against 6 percent in the April-June period last fiscal.

Furthermore, industrial output expanded by 13.8 percent in July from 7.2 percent in the corresponding month last year.

RBI panel to review repo, reverse repo process

The Reserve Bank of India (RBI) on Monday said its committee on monetary policy will review the operating procedure with respect to repo, reverse repo auctions; width of the interest rate corridor; and frequency and timing of reverse repo and repo auctions.
In its quarterly policy review in July, the RBI had announced its plan to set up a panel to monitor the operating procedure of the monetary policy, including liquidity adjustment facility.
Rate corridor is the spread between repo rate -- the rate at which the RBI infuses liquidity -- and reverse repo rate -- the rate at which liquidity is drained out.
The panel will look at monetary policy in the light of global practices and domestic experience.

The terms of reference include:
* whether there is a need for a rate corridor at all
* whether its width should be fixed or variable
* what are the tools necessary to enable the corridor to function efficiently.

The committee will be headed by Deepak Mohanty, executive director, RBI.
The panel will also compare its monetary policy with operating methods of other central banks, the RBI said.
The RBI had introduced repo and reverse repo rates in June 2000 when it had started the liquidity adjustment facility.
Besides interest rates, other tools such as cash reserve ratio (CRR), open market operations (OMO) and market stabilisation scheme (MSS), have served the monetary policy management well, the RBI said.

"However, India's increasing integration with the global economy, large volatility in capital flows and sharp fluctuations in government cash balances have posed several challenges to liquidity management by the Reserve Bank, particularly in effectively signalling the monetary policy stance," the RBI said, explaining the rationale behind forming the panel.
The committee will also the assess the role of Bank Rate, which has been unchanged since April 2003 and is considered defunct now as no real interest rates are linked to this rate.
Bank Rate was used to signal change in interest rates over medium to long term, while repo and reverse repo rates are short-term rate tools.

Inflation to come down in coming months: PM

New Delhi: Prime Minister Manmohan Singh Wednesday expressed hope that inflation, which is close to the double digit mark, will come down in the coming months.

"Let us hope, it (inflation) will come down in the coming months. I am not an astrologer," he told reporters here.

The overall inflation stood at 9.97 percent in July and the figure for the month of August is expected next week. The Wholesale Price Index (WPI) inflation has been over 10 percent for five straight months till June.

For the week ended August 21, food inflation stood at 10.86 percent.

When asked about ONGC disinvestment, the Prime Minister said, "it is an ongoing process. I don't know which company will be divested. We have an able Finance Minister who is dealing with the subject."

The government is aiming to mobilise Rs 40,000 crore from disinvestment during the current fiscal.

On inflation, the Prime Minister had last month said that the government is making every possible effort to control "high inflation" and insulate poor from its adverse impact.

While addressing the National Development Council meeting in July, Singh had said that inflation would come down to around 6 percent by December this year.

"I know that in the last few months high inflation has caused you difficulties. It is the poor who are the worst affected by rising prices, especially when the prices of commodities of every day use like foodgrains, pulses, vegetables increase."

"It is for this reason that we have endeavoured to minimise the burden of increased prices on the poor," Singh said while speaking on the 64th Independence Day.

The opposition BJP and the Left parties have attacked the government over surging food prices. The Parliament was disrupted for a week during the monsoon session on the issue.

After which an understanding was reached between the two sides and a resolution was adopted in the two Houses asking the government to take further steps to control price rise.

Inflationary pressures is easing, says RBI

Bangalore: Reserve Bank of India Governor D Subbarao Saturday said the country's economic growth is getting broad-based and inflationary pressures are easing.

"There is evidence that growth is getting more broad-based. Inflationary pressures too are easing because of improved supply position as also the impact of monetary tightening effected by the Reserve Bank," he said while delivering a lecture here.

"Going forward, the Reserve Bank will calibrate policy action to the evolving growth inflation dynamics," Subbarao said.

"Given the uncertainty in the world and the lags in monetary transmission, it is not possible to offer more precise guidance. All I can say is that our guide post is festina lente-as the Romans used to say-make haste slowly".

Subbarao, who was speaking on "Economic Crisis and Crisis in Economics : Some Reflections", said the Reserve Bank has to balance between the objectives of growth, price stability and financial stability.

"Determining this prioritisation is the judgement call of the Reserve Bank. People who apprehend that monetary tightening will hurt growth must remember that even if there is some sacrifice of output in the near-term, we are better off curbing inflation since inflation can be inimical to sustainable and equitable growth in the medium term", he added.