The Telegraph
Since 1st March, 1999
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Monetary policy linked to global cues

Mumbai, June 10: It’s not inflation alone that plays a role in determining the Reserve Bank of India’s (RBI) monetary policy.

RBI governor Yaga Venugopal Reddy today added another factor to the whole process when he said that the central bank was now according greater weightage to global factors.

This means global factors would also now start playing a role in shaping the central bank’s monetary policy. A strong indication to this effect was available on Thursday when the Reserve Bank, in an unexpected move, raised both the reverse repo and the repo rate by 25 basis point each.

While combating inflation after the recent hike in petrol and diesel prices was the prime reason, it came on a day when the European Central Bank (ECB) raised rates by 25 basis points to 2.75 per cent. Earlier, US Federal Reserve chairman Ben Bernanke hinted about the possibility of another rate hike later this month in an attempt to rein in inflation.

Talking to reporters in Pune today, Reddy justified the recent hike in the two rates and said interest rates were hardening globally and India could not be out of step with the monetary developments in the world. He further pointed out that rising crude oil prices, strong demand for credit and rising commodity prices were the three factors that led to this decision.

“Several central banks have raised interest rates globally. Our monetary policy cannot be out of sync with the policies of major economies. We are now in sync with global policies,” he added, while confirming that global factors were now accorded greater weightage.

“We wanted to put an end to uncertainty regarding the monetary policy,” Reddy said.

The possibility of interest rates hardening in overseas markets was one of the key factors that had led to stock indices losing more than 1100 points in four trading sessions, even as the rupee suffered losses against the dollar. It was feared that portfolio inflows would run dry as FIIs move out.

Reddy, however, reiterated the central bank’s focus on inflation when he said the country’s price situation would require “greater sensitivity” and the effort of the monetary policy was to contain inflation in a range of 5-5.5 per cent.

Reddy was of the opinion that inflation will be below 5 per cent in the medium term. The RBI has projected inflation to stand between 5.0 and 5.5 per cent for the current fiscal.

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