The Hindu Business Line : Reverse repo hike not to impact lending rates, says Chidambaram

THE Finance Minister, Mr P. Chidambaram, has said that the Reserve Bank of India's move to hike the reverse repo rate would not immediately affect lending rates of banks. He also hinted that the Central Government might borrow less than the budgeted amount during the current fiscal.

A reverse repo rate is the interest rate earned by a bank for lending money to the RBI in exchange for Government securities.

The RBI uses repo and reverse repo as instruments for liquidity adjustment in the system.

"The assumption that you are making that an increase in reverse repo by 25 basis points will have an immediate impact on bank lending rate is not correct.

"There is enough liquidity in the market and, therefore, lending rates will be benign. There are many cases where lending takes place at sub-PLR rates," Mr Chidambaram said in his reactions to the RBI's Monetary and Credit Policy that was announced on Thursday.

On Government borrowings, he said the Government might not borrow as much as the level indicated in the budget. "Our calculations now show that we may have to borrow less than that. The Government is to borrow Rs 10,000 crore in the first week of May. But we will restrict our borrowing to Rs 8,000 crore," Mr Chidambaram said.

Commenting on inflation, Mr Chidambaram said it was under control but oil prices continued to be a source of concern. "We will take steps to maintain price stability," he said. On the gross domestic product (GDP) growth projections made by the RBI in its policy, Mr Chidambaram said that he was "very happy that the RBI concurred with the views of the Department of Economic Affairs (DEA)".

Later speaking to newspersons, Dr Rakesh Mohan, Secretary, DEA, held that Government's cost of borrowing was unlikely to see a significant increase on account of policy pronouncements.

"I don't think we are going to see any significant increase or change in the cost of borrowings. There is enough liquidity in the market for smooth implementation of borrowing programme," he said.

Dr Mohan said that there was a possibility that this year too "we might have a situation like last year where the borrowing was lower than the projected levels". Last year, the Government's borrowing was lower mainly on account of the debt-swap scheme for the States.

This year, the Centre has hefty cash balances that may prompt it to go for lower borrowings. He added that the RBI's move to hike the reverse repo rate and not the bank rate should be seen as a signal of the determination of the RBI to keep inflation low and stable.

Dr Mohan declined to comment on future movement in interest rates and pointed out that this was entirely in the domain of the RBI.

"But if I were to interpret the policy, then looking at the overall macro-economic situation, inflationary expectation, liquidity situation, one is not seeing any pressure on interest rates," he said.

On the inflation rate of 5-5.5 per cent projected for 2005-06 by RBI, the Chief Economic Advisor, Dr Ashok Lahiri, said that he hoped that there was the "conservatism of RBI" that was reflected in these projections. Central bankers tend to be "very conservative" in their projections.

Asked whether the projected agricultural growth rate of 3 per cent for 2005-06 was ambitious, Dr Lahiri said: "It is not too bad".

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