The Telegraph
Since 1st March, 1999
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Rates on hold, but crystal ball glows

Mumbai, Nov. 3: The Reserve Bank today left rates unchanged in a strategy that was prompted by strong growth impulses and the sense among policy tsars that there’s ample cash sloshing around.

Loan-lovers were not pampered more, but the central bank more than made up for that by dishing out a growth forecast of up to 7 per cent. This is a notch higher than the level the economy was seen at in April.

Y. Venugopal Reddy, who recently became the RBI helmsman, conceded that he walked down the road taken by his predecessor, Bimal Jalan, in presenting his first credit policy. “It is basically the same in outline and substance,” he told reporters later.

Small savers spared another cut on their deposits that a reduction in bank rate would have led to, were not popping champagne bottles. Reddy said soft rates were here to stay. “The stance continues, but the monetary measures are taken on the basis of the emerging conditions of the financial markets and are not taken necessarily on the day of the policy,” he said after the presentation of the document.

The widely expected cuts in the bank rate — the signal for banks to consider revising their lending and borrowing rates — did not come through because of a wait-and-watch stance that RBI felt was needed at this juncture. Hopes of a reduction in the cash-reserve ratio (CRR) were also belied. CRR is the portion of deposits that banks maintain with the RBI. The bank rate at 6 per cent is the lowest ever, brought down from 8 per cent over the past three years.

In a signal that the economy was cruising into the fast lane, the RBI also said inflation fall to 4-4.5 per cent compared with earlier projection of 5-5.5 per cent. The growth prediction for this year has been raised to 6.5 per cent to 7 per cent from 6 per cent in April.

“Growth prospects are better, the inflation outlook remains benign, interest rates and foreign exchange reserves are at comfortable levels and there is adequate liquidity in the system,” Reddy said.

In Delhi, chief economic adviser to the finance ministry, Ashok Lahiri, said the government is on track to meet its fiscal deficit target of 5.6 per cent and the Reserve Bank’s revised growth forecast of 6.5-7 per cent is in line with the Centre’s own assessment.

Although the fiscal deficit in the first half (April-September) of 2003-04 is higher than the budgetary estimate, “there is nothing that leads to believe that the 5.6 per cent deficit target will not be achieved,” he said.

“If you think a rate cut is going to pump the economy then that is taking a rigid view,” he told reporters adding that the economy would continue to grow without the rate cut.

“The credit policy announcement indicates the RBI's willingness to support the ongoing recovery but that it is concerned about a possible firming up of prices,” said Subir Gokarn, chief economist of Crisil.

The CII said the excess liquidity in the financial system along with the recent 50 basis point cut in the repo rate has prompted the RBI to hold interest rates. “If the RBI chooses to reduce the bank rate as well as the CRR, it can do so later —preferably around mid-February 2004, prior to the Union Budget,” said chamber president Anand Mahindra.

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