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RBI prepares ground for rate hike

Mumbai, Jan. 29: Hinting at raising short-term rates on Wednesday in its quarterly review of monetary policy, the RBI today said inflationary pressures remain in the economy though the recent fiscal and monetary correctives have managed to contain them to an extent.

In its review of the economy, which precedes its quarterly monetary prescriptions, the Reserve Bank of India (RBI) prepared a case for another possible hike in both reverse repo and repo rates.

The Macroeconomic and Monetary Developments — Third Quarter Review 2006-07 of the RBI said the inflation rate remained high in India, largely due to higher food prices, while central banks across the world followed a restrictive regime for rates since end-September 2006.

Analysts expect RBI governor Y.V. Reddy to raise the reverse repo and repo rates by 25 basis points each. The central bank borrows from banks at the reverse repo rate and lends to banks at the repo rate. Reviewing the quarter, the RBI said primary food articles and manufactured products exerted pressures on headline inflation. Inflation, based on the wholesale price index, was 6 per cent on January 13, 2007, much higher than 4.1 per cent at end-March 2006 and above the projected band of 5-5.5 per cent set by the RBI for end-March 2007.

The RBI said the objectives of the monetary policy were to maintain price stability and ensure adequate credit to the productive sectors.

“The relative emphasis between price stability and growth, however, has changed depending on the underlying macroeconomic conditions. Monetary policy in India, thus, strives for a judicious balance between price stability and growth,” the report said.

It said that since September 2004, the strategy of accommodation in monetary policy was withdrawn in a phased manner to contain inflation and stabilise inflationary expectations.

However, the strongest indication of a rise in rates is in the report’sX assertion that effective monetary policy has as much to do with inflationary expectations as the actual outcome of inflation. Analysts say that with underlying inflationary pressures remaining in the economy, the central bank could raise rates to tame inflationary expectations.

The report also referred to other conditions behind a possible rise in rates. While bank credit continued to grow rapidly, broad money growth remained above the indicative trajectory, reflecting strong demand conditions.

Broad money (M3) growth, year-on-year (y--y), accelerated to 20.4 per cent as on January 5, from 17 per cent at end-March 2006 and 16 per cent a year ago.

On a year-on-year basis, non-food credit of scheduled commercial banks registered a growth of 31.2 per cent as on January 5, the same rate as a year ago. However, on the positive side, the report was of the opinion that the ongoing momentum in economic growth is likely to be robust for the rest of the fiscal.

Further, business confidence surveys suggest that economic activity is likely to remain buoyant in the near term.

After falling in the previous round, in the aftermath of volatility in stock market and elevated oil prices, business confidence indices of various agencies recovered on the back of a rebound in the stock market, decline in international crude oil prices from their record highs, close to normal monsoon, strong economic growth, high level of capacity utilisation and improved expectations of financial performance.

“The industry and the services sectors have so far remained strong during 2006-07. Business confidence surveys also suggest that economic activity is likely to remain buoyant in the near term. The ongoing momentum in economic growth is, thus, likely to remain robust in the rest of 2006-07’’, the report added.

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