RBI aims for enduring growth
MONETARY POLICY MID-TERM REVIEW 2006-07
| Given the current conflicting macroeconomic environment, the RBI had to take the tough decision of hiking the repo rate by 25 bps to 7.25%. However, the reverse repo rate has been kept unchanged at 6%, which has resulted into the spread of 125 bps between the two. |
| The Case for rate hike was steaming from the fact that inflation is prevailing at elevated levels, economic growth is robust and the credit growth is increasing on a sustained basis. |
| Though there does not seem to be an immediate impact of the same on cost of funds for banks as banks are not borrowing from RBI at the moment but going forward as and when they do the cost will be higher. |
| Thus this is effectively an interest rate rise signal - even if banks were not to borrow from RBI as such, cost of funds in general could move up. |
| The RBI has stated that on the global front economic parameters have been sound and broad based and that global risks have not changed significantly from the time of the First Quarter Review in July, 2006. |
| However on the domestic front though economic growth momentum has been robust, indications of growing demand pressures and potential risks from rapid credit growth, strains on credit quality and elevated asset prices have resulted into close monitoring of monetary conditions and liquidity situation for any signs of risks to inflation. |
| RBI's decision may not have a very substantial impact on the financial services sector as financial markets have strengthened and have been orderly in the second quarter of 2006-07 although interest rates have firmed up in almost all segments. |
| Essentially RBI has struck a balance between taking the step now vis-a-vis not being able to do this close to the election period. |
| A choice between growth and inflation resulted in favour of inflation as potential price pressures persist in the country due to firming up of food and metal prices, the uncertainty surrounding international crude prices and the monetary overhang. |
| The RBI is focusing on an overall fundamental economic order in order to ensure a broad based enduring growth. |