Article first published as Indiaâ€™s Policy Review: RBI Raises Rates, Says Last Time in Near Future on Blogcritics.
RBI has raised bank ratios again by 25 basis points in its November 2 policy review. It has lifted he repo rate, at which it lends to banks, to 6.25 percent and reverse repo rate, at which it absorbs excess cash from the system, to 5.25 percent. RBI has discussed global and domestic scenarios in its second review of monitory policy 2010-11.
RBI has noted that though IMF revised upwards its forecast for world growth in its October 2010 World Economic Outlook from 4.6 to 4.8 percent, growth in advanced economies like the US and Japan has been still sluggish. Unemployment, modest income growth, lower housing wealth and tight credit were impediments for the US growth, RBI said. It noted that slowdown in industrial production and exports’ growth reflected the moderation of economic recovery in Japan.
However, the Euro region is showing signs of resilience in the aftermath of the sovereign debt crisis which is again uneven. RBI has said the growth in the Emerging Market Economies (EMEs) continued to be strong. It has particularly pointed out that the strength of the EMEs is led by domestic demand but supported by exports, indicating that without the exports’ support, the growth could be weaker.
RBI says India’s growth set in second half of last fiscal year, is consolidating with Q1 growth recording at 8.8 percent. It expects normal South-West monsoon will contribute to increase in Agricultural production. RBI and Planning Commission have been telling for last one and half years that the normal monsoon will help reduce the stubborn inflation, which is proved wrong. It seems they still do not find any fresh reason for showing as pretext for high inflation.
Industrial growth has been robust but volatile with average figure of 10.6 percent during April – August 2010. Volatility suggests deceleration but momentum is continuing. Direct and indirect taxes increased over the last year.
(Article first published as Reserve Bank of India Beats Forecast on Rate Hike on Technorati.)
The Governor of Reserve Bank of India, Duvvuri Subba Rao could not allow himself lagging behind the trend of beating forecast by growth numbers of India. At the quarterly review meeting on Sept 16, 2010, the RBI raised interest rates more aggressively than expected. The RBI lifted repo rate, at which it lends to banks and other financial intermediaries, by 25 basis points to 6 percent. It also lifted reverse repo rate, at which RBI absorbs the cash from the system, by 50 basis points to 5 percent.
The deference between the repo rate and reverse repo rate is decreased from 1.25 percent to 1 percent, signalling that the central bank is committed to control the high rate of inflation. "Inflation remains the dominant concern in macroeconomic management," the central bank said in a statement released to reporters. “Monetary Policy Review: September 2010,” almost confirmed that the inflation rates have reached their peak, but cautioned it is likely to remain at unacceptably high levels for some months.
Several factors prompted the central bank to rein in the inflation, which is still nearer to the double-digit figure. Almost double the forecast growth (13.8 percent) of Industrial output in July 2010; rocket speed rise of the share markets; and robust annualized growth rate of GDP (8.8 percent) for the quarter ending with June 2010 necessitated controlling the money supply in the system.
Rising rates have also weighed on factory output, which rose at its slowest pace in 13 months in June at 7.1 percent from a year earlier. Exports grew an annual 30 percent in June, slower than 35 percent rise in May. Still, the RBI has forecast the economy will expand 8.5 percent in 2010/11 from 7.4 percent last year and the fastest pace among major economies after China. Bajoria reiterated the bank’s forecast for another 25 basis points increase in key rates by the RBI when it reviews policy on Sept. 16. “The market has fairly priced in both policy rate hike and liquidity constraints. Once the RBI has given its intention that repo rate will be the operating rate, I don’t think market is panicking on the liquidity situation,” he said. Continue reading
The Reserve Bank of India (RBI) on Wednesday said it intends to grant a limited number of new bank licences, a move that was earlier flagged by the government to expand the geographic reach of the sector. The RBI, in a discussion paper on the subject of entry of new banks, has invited comments on the minimum capital requirements as well as promoters shareholding in new banks. The RBI also initiated discussion on foreign shareholding in new banks, whether industrial and business houses could be allowed to set up banks and if finance companies should be allowed to convert into banks or set up a bank. The central bank highlighted the pros and cons and the past international experience on all the parameters on which it has invited the comments.
On Tuesday, junior finance minister Namo Narain Meena told lawmakers 18 foreign banks have approached the central bank for opening their maiden branches or representative office. Finance Minister Pranab Mukherjee had, in the budget for 2010/11, announced the intention to grant additional banking licences to private sector players to expand coverage. The RBI’s previous guidelines on new bank licences released in January 2001 were “cautious in nature,” the central bank said. Continue reading
The Reserve Bank of India’s (RBI) “appropriate monetary policy” is absorbing excess liquidity and helping efforts to tame inflation, the finance minister told parliament on Wednesday. Pranab Mukherjee, responding to an opposition-sponsored debate on inflation, also said rising prices were a cost of rapid expansion of Asia’s third-largest economy. “If I want to compromise with growth rate of 5 percent, or 5.5 percent, if I want to compromise with my export growth, if I want to do that, I can surely control the inflation,” he said. Wholesale price index, India’s most closely watched inflation measure, have risen more than 10 percent from a year earlier for the past five months. The index rose 10.55 percent in June and is expected to record a double-digit rise in July.
Spiralling prices have led to street protests against the Congress party-led government, and the opposition parties have accused it of not doing enough to control prices. “Appropriate monetary policy is mopping up excess liquidity,” Mukherjee said. “We have ensured the excess liquidity in the market has been mopped … The Reserve Bank is keeping its eye constantly on that.” The RBI has said it will manage liquidity to ensure an excess does not prevent policy signals from being transmitted to the monetary system. Continue reading
MSN News | Reuters | 27/07/2010
The Reserve Bank of India on Tuesday raised interest rates more forcefully than expected in the face of inflation that has held stubbornly above 10 per cent for the past five months. The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 per cent, in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by 50 basis points to 4.50 per cent. Following are the views of industry officials to the policy.
PRAMOD MENON, CHIEF FINANCIAL OFFICER, JSW ENERGY
"The rate hike is well warranted and there should not be any problem until the rate of economic growth continues to be robust. There will be a slight impact on interest rates, but I believe, everybody is prepared for it."
SANTOSH SINGHI, CFO, AMTEK AUTO LTD
"The rates will firm up. This may lead to a liquidity crunch in domestic market in the coming months as many large projects are still rupee-funded. I do not think the OEMs (original equipment makers) will accept an increase in component prices because of a rise in rates. The only way we can compensate is increasing our volumes and scale of operations".
VIRENDRA MHAISKAR, CMD, IRB INFRASTRUCTURE DEVELOPERS
"In our case we have tied up the funds with a fixed rate for next three years, anticipating the tightening. We won’t be impacted at all. For the infrastructure (sector), it’s a counter-productive move on a long-term basis if the interest rates are hiked for the growth sector."
RUPEN PATEL, MANAGING DIRECTOR, PATEL ENGINEERING
"RBI has increased reverse repo by 50 basis points and repo rate by 25 basis points. CRR has remained unchanged at 6 per cent. Market anticipated much more tightening than what has been announced. As such we feel no negative impact on our sector for the action taken by RBI."
Reuters | Fri Jul 23, 2010 | 10:53am IST
Inflation in India has spread beyond food and fuel prices and is becoming entrenched; meaning the Reserve Bank of India (RBI) may have little choice but to tighten policy more aggressively than now expected. A majority of economists polled by Reuters this week expect the RBI to raise interest rates by 25 basis points for a fourth time since March in its quarterly review on July 27. Most also expect the central bank to notch up rates by just another quarter point before the end of the year, given a tightening of market liquidity in recent weeks and uncertainty about the strength of global recovery. However, trends in broad money growth, the credit-deposit ratio and rising imports suggest inflationary pressures are likely to remain and may pose a bigger challenge later on, calling for a more aggressive action.
PACE OF IMPORT GROWTH MAY WIDEN TRADE GAP FURTHER
With India expected to grow more than 8 percent this year and next, imports are expected to pick up. Since export growth is weak, rising imports threaten to push up the trade deficit up substantially, in turn widening the current account deficit, which reached $13 billion in the January-March quarter, its biggest since 1981. A more decisive monetary tightening to curb domestic demand would help keep India’s external imbalances in check.
RESERVE MONEY GROWTH THREATENS TO PUSH INFLATION HIGHER
Reserve money has been rising rapidly in recent months. Before the financial crisis, reserve money consistently led broad money growth, the central bank’s key monetary gauge. Between 2000 and 2007 the annual change in reserve money had a 0.6 correlation with the year-on-year change in M3. That dropped to 0.4 for the ‘2000-2010’