The Reserve Bank of India (RBI) governor, Duvvuri Subbarao, said “effective rates” have already risen, dousing fears of an immediate policy rate increase and committed to keep liquidity flowing, though inflation is running at double his annual target.
For the second time in a week, the central bank said it would buy back government bonds worth Rs 10,000 crore, aiming to ease the liquidity crunch and stabilise bond yields. It rejected bids for high yields in the Rs 6,000-crore auction of 6.85% 2012 paper, where Rs 1,386 crore devolved on primary dealers.
“The effective rate has moved up from the reverse repo rate, which is at 3.75%, to the repo rate, which is at 5.25%,” Mr Subbarao told reporters here on Friday. “So, there has been some automatic tightening which has taken place.”
Repo is the rate at which the central bank lends to banks, and reverse repo is the rate it pays banks that deposit excess funds with it.
Investors and companies, benefiting from cheap funds, fear that the central bank may raise policy rates ahead of its quarterly review on July 27 to stave off inflation. But the cost of funds has already risen in the system. The money market trend in the past month has reversed from banks parking excess funds with the central bank at 3.75% to borrowing from it at 5.25%. That is due to a surge in demand for funds to make tax payments and to fund spectrum purchases by telecom companies.
“The outflows because of 3G and taxes are in excess of Rs 1,00,000 crore, which is equivalent to a 2.5-percentage-point hike in the cash reserve ratio,” said Pradeep Madhav, MD, STCI, a primary dealer. “This has already pushed up rates at the near end, and the 5.25% repo rate has become the effective rate. So, where is the need for a rate hike when the step has already been taken.”
Cash reserve ratio is the portion of deposits that banks have to set aside with RBI.
Policymakers, who sailed with the Western world in making money cheap and boosting liquidity to overcome a credit crisis, are grappling with a peculiar problem.
Developed markets, where inflation is low and economy sluggish, are keeping rates low. But domestic demand in India and China is pushing up prices, potentially destabilising future growth.
“It can no longer be treated as purely food inflation,” C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council and a former RBI governor, said on Thursday. “The manufacturing sector is also showing a reasonably high degree of inflation. Therefore, some action on the demand side is called for... I think the question of taking some action in terms of tightening the policy has become imperative.”
Food price inflation for the week ended June 5 was at 16.12%, March wholesale inflation rate was revised upwards to 11.04%, and in May, it was 10.16%.
Mr Subbarao maintained that the central bank is on course to raising rates. “Yes, that remains our stance that we must do a calibrated exit from the expansionary stance that had been taken during the crisis,” he said. “Even as growth is picking up momentum, the current double-digit inflation remains a concern, as demand side pressures in the economy are going up, RBI has already initiated a series of steps.”
Policy rates have been raised by 25 basis points twice this year and also the cash reserve. A basis point is 0.01 percentage point. RBI’s inflation target for March 2011 is 5.5%.
Source : Economic Times
Posted by: Rishma Shetty
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