Measures in line with market expectations

With GDP growth estimated at 8.4 per cent for the first quarter of the current financial year, the Reserve Bank of India (RBI) and forecasters are confident that India’s growth rate for 2010-11, even by conservative estimates, will be around 8.5 per cent. Inflation has been the bête noir of the Indian economy for quite some time, causing RBI to continue with its monetary tightening measures.

By increasing the repo rate by 25 basis points and the reverse repo rate by 50 basis points, the central bank is maintaining its calibrated approach towards withdrawal of its accommodative monetary policy. These measures are also in line with market expectations. While short-term government bond yields have risen sharply, long-term bond yields remain steady and have not fluctuated.

As at July 2, 2010, the year-on-year credit growth has picked up to stand at 22 per cent as compared to 16 per cent in the previous year. However, the year-on-year growth for aggregate deposits has slowed at July 2, 2010 to 15 per cent as compared to 22 per cent in the previous year. This, coupled with tight liquidity – primarily due to a sharp increase in government cash balances on account of the 3G and BWA auction receipts and advance tax payments – has also prevented RBI from taking aggressive measures. In the short term, liquidity conditions may be tight but will be manageable as SLR investments of banks are in excess of 4.6 per cent over the prescribed limit.

Although liquidity conditions are not expected to ease significantly, there will be some respite from government spending and g-sec redemptions in the ensuing period. Further, inflation is expected to moderate in the coming months due to the base effect and also due to expectations of favourable monsoons, which will aid in the fall in food inflation.

Keki Mistry, Vice Chairman and CEO, HDFC