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Hard bargain on rate hike

New Delhi, July 14: The Reserve Bank of India and the finance ministry at a meeting here today failed to arrive at a consensus on raising interest rates later this month, sources said.

After rooting for a cheap money policy to push growth, the North Block has now veered towards raising interest rates to neutralise the pressure on prices by a global crude market on the boil.

The RBI would prefer to wait for crude prices to rise further before signalling another rate hike.

Central bank officials feel government borrowings and corporate debts would absorb most of the excess liquidity in the system, without threatening prices.

“Don't go by the Bank of Japan rate hike ' growth in bank credit here has been extremely sluggish as interest rates are moving up in any case. Consequently, an immediate rate hike may not go down too well,” a senior RBI official said.

Bankers, however, are willing to go with a small rate hike because of pressure on their margins. A hike will also pave the way to raise deposit rates which has become necessary as banks fear a squeeze on their deposits.

The finance ministry and the RBI, however, agreed to further liberalise foreign direct investment (FDI) norms to step up inflows and keep the current account deficit within 1.5 per cent of GDP.

There are fears of the deficit rising on the back of receding FII flows and a higher import bill caused by spiralling oil prices.

Analysts feel a higher deficit creates a fear psychosis among investors by enhan-cing the risk profile of the country.

Foreign exchange reserves have started declining marginally after jumping to $163 billion in mid-May from $143 billion in February, due to greater FII withdrawals and a rising oil bill.

With oil prices showing no signs of cooling and interest rate differentials between India and elsewhere getting reduced, reserves will either remain unchanged or decline marginally in the coming months.

For the RBI and the North Block this is a cause for concern, forcing them to explore ways to raise FDI.

The only ray of hope is remittances from abroad. NRI remittances are at $21 billion a year, nearly double the net FII inflow. NRI deposits are $32 billion, at 23 per cent of forex reserves.

Inflation at 4.96%

Costlier iron, steel, chemicals, textiles and some non-food products pushed up the rate of inflation to 4.96 per cent for the week ended July 1 from 4.84 per cent in the preceding week. The wholesale price-based inflation was, however, lower at 4.14 per cent during the corresponding week last year.

The government claimed that inflation had receded to below 5 per cent on June 24 after touching the year’s high of 5.44 per cent for the week ended June 17.

The government faces the challenge of containing the inflation rate in the range of 5-5.5 per cent this fiscal as prices of petroleum products and essential items have risen.

During the week under review, crude prices hovered around $74 a barrel. This poses a major problem as domestic prices of petroleum products have been held in check due to political reasons even as the national oil companies are seeking a price hike.

RBI stand

The Reserve Bank today said there is no change in its stance on inflation, which it has projected to be 5-5.5 per cent this fiscal.

“There is no change in our stance on inflation from what we had stated in our annual policy,” RBI deputy governor Rakesh Mohan, who met finance ministry officials ahead of the RBI’s quarterly policy review on July 25.

“You will know our view about inflation in our quarterly policy review,” Mohan added.

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