Reddy and Chidambaram: Custodian call

New Delhi, July 25: The finance ministry is believed to be against a further hike in the repo rate, which is the rate at which the Reserve Bank of India (RBI) lends to banks and a benchmark for all lending rates of banks.

Instead, the ministry wants the RBI to suck money out of the economy by increasing the cash reserve ratio (CRR) or the portion of deposits that banks must keep with the RBI.

The logic is simple: any hike in the repo rate immediately impacts prime lending rates of commercial banks while a CRR tweak works into the monetary system over a period of time.

With inflation showing signs of slowing, top officials said it was time to rethink the strategy though the appropriate action would be decided by the RBI in its quarterly review next week.

Last month, the RBI had raised the repo rate by 75 basis points in two instalments to a six-year high of 8.5 per cent and CRR by 50 basis points in two phases to 8.75 per cent.

“Money supply is still growing at a fast pace of over 20 per cent or so and this does remain a point of concern. However, industrial growth is slowing down. Further increases in lending rates may not be good news for the economy,” the officials said.

Economic growth has already slowed to 9.1 per cent for 2007-08 compared with 9.4 per cent and 9.6 per cent, respectively, in the previous two years. The economy is expected to grow 8.5 per cent this year, though a World Bank report has projected that growth may drop to as low as 7 per cent.

Infrastructure growth, too, has fallen to 3.6 per cent in April 2008, according to the data released today. Industry lobbyists say the continuous rise in prices and with it the lending rates of banks are taking toll on their expansion. This may hurt industry growth.

They have pleaded with the government not to pursue the tight money policy for a while because funds which had already become costly would become dearer still, eating into profits and delaying projects.

The RBI has been following a costly money policy in a bid to stem demand and slow down inflation. India’s inflation has already risen to a seven-year high of 11.91 per cent on the back of rising food and commodity prices, though figures released yesterday showed a marginal decline of 0.02 per cent.

Reddy meets FM

Ahead of the monetary policy, RBI governor Y.V. Reddy today met finance minister P. Chidambaram here.

Reddy, who had an hour-long meeting with the finance minister, however, declined to make any comment.