The Reserve Bank of India’s double-barrel attack on inflation, and more so on inflationary expectations, using both its deadliest instruments — repo rate and cash reserve ratio, in that order — should not come as a shock or a surprise to bankers and economists. There have been strong demand pressures on the economy as clearly reflected in the banking system.Despite a tight monetary stance followed by the central bank since September 2004 to address concerns that the economy was overheating, the money supply has risen 21.4 per cent as on June 6, 2008, much above the RBI’s indicative projection of 16.5-17 per cent. Non-food credit jumped 26.2 per cent, above the indicative projection of 20 per cent, and so did aggregate deposits by 23.2 per cent, compared with a 17 per cent projection for the full fiscal.Clearly, the RBI move is to suppress the demand pressures building on the economy by making it difficult for all to borrow cheap. And it had to start with banks. Only three banks — J&K Bank, HDFC Bank and YES Bank — responded to the hike in repo rate (the rate at which banks borrow from the RBI) by the central bank on June 11. For whatever reasons, banks were not picking Mint Street signals.Besides inflation that touched a 13-year high of 11.05 per cent for the week-ending June 7, investment demand continued to be strong at 14-19 per cent a year since 2002-03 and currently contributed 36 per cent of the GDP. Production of consumer goods had revived and goods imports were running ahead of exports. And 60 per cent of the overall growth in imports in April was contributed by non-oil imports.
