RBI targets inflation, not growth

The reverse repo rate — key short-term interest rate on bank funds parked with RBI — is now 5.25 per cent. And the repo rate — the rate at which RBI lends to banks against securities — is at 6.25 per cent.

The RBI’s signal to suck out some liquidity in the system is a clear indicator that interest rates are expected to stay put, at least in the short-term. That said, at a time central banks the world over are pointing to a hardening of interest rates, pressure is building up.

RBI Governor Y.V. Reddy doesn’t foresee any immediate changes in its policies till next April. He also made it clear that the central bank will remain consistent with its emphasis on price stability in the remaining part of the year.

‘‘Making an assessment on the domestic and foreign factors, we feel that the measures already taken in the monetary policy should see us through till the beginning of the next year, unless there are unforseen developments,’’ he said.

Finance Minister P. Chidambaram said in New Delhi that the twin rate hike would not lead to any adverse impact on cost of credit for investment for productive activities.

Bankers and markets welcomed the new measures. The benchmark Sensex, which tanked by 148 points on Monday amidst bank rate fears, recovered by 71 points today. However, some bankers did hint at a marginal rise in the interest rate movement due to the sharp rise in credit offtake.

‘‘The new policy has touched the right chord and growth momentum will continue,’’ ICICI Bank Managing Director and CEO K.V. Kamath said. The bank would review increasing interest as well as lending rates in due course of time, he added.

‘‘Bank of India would not change lending rates all across the board but in certain segments there might be some changes,’’ said Bank of India CMD M. Balachandran.

In its mid-term review of the annual credit policy, RBI had concentrated basically upon two things: price stability and credit quality. ‘‘Keeping this in mind, we look at the monetary policy and find there was no basic change as against the policy declared in April,’’ Reddy said.

‘‘RBI would also ensure an interest rate environment conducive to macro-economic activities and price stability in order to maintain the growth in the economy,’’ he added.

The central bank raised concern over the rising inflation in the wake of the steep rise in crude oil prices. ‘‘In the context of the oil economy in India, it may be difficult to contain inflation in the range of 5.0-5.5 per cent projected earlier without an appropriate policy response,’’ RBI said.

Notwithstanding several worries, RBI is bullish about the overall economic growth. It also raised its growth forecast for the financial year 2005-06 to 7.0-7.5 per cent from ‘‘around 7.0 per cent’’ forecast in April, citing a pick-up in farm output and momentum in other sectors of the economy.

This view was mirrored by Chidambaram. RBI’s growth forecast was ‘‘encouraging’’ and there are indications of an investment boom supported by buoyant growth in credit as well as improved performance of agriculture, he said.

RBI remained optimistic about the course taken by the industrial sector. ‘‘Overall industrial growth has strengthened, monsoon fears have eased, non-food credit growth has been buoyant, broad-based and supportive of the acceleration in the industrial activist,’’ RBI said.

Among other measures, RBI has asked the Indian Banks’ Association to review the Benchmark Prime Lending Rate (BPLR) system and issue transparent guidelines for appropriate pricing of credit as the current system failed to meet expectations. The measures, when announced, would have big implications for consumers.

RBI also proposed introduction of short-selling in G-secs, relaxed ECB rules by allowing special purpose vehicles to be treated as financial institutions to raise funds from abroad and decided to make banks’ aggregate capital market exposure at 40 per cent of their net worth.