The Hindu Business Line : Going with the global tide

The RBI's actions are driven by a desire to be seen as being in accord with the ongoing global rate hike campaign. The apex bank insists that it would provide support to the realisation of growth potential without adding to inflation expectations.

THE 25 bps hike in the repo rates in the Policy Review points to the RBI's desire for forward-looking action to address inflation related concerns. Earlier, in the Review of Macro Developments published on October 24, the Reserve Bank of India dwelt on the rise in inflation in various economies and the rate hikes by the central banks of those countries to control inflationary expectations.

The RBI seems worried that the oil price rise could be permanent and, given inadequate domestic pass through in prices, the impact on domestic inflation could be prolonged.

Further, it is clear that the RBI's actions are driven by a desire to be seen as being in accord with the ongoing global rate hike campaign.

The apex bank insists that it would provide support to the realisation of growth potential without adding to inflation expectations. With credit expansion providing much-needed funding for investment, the RBI promises to provide adequate liquidity with emphasis on price stability.

Without doubt, growth objective remains the prime driver of the latest policy and this removes any short-term risk to the still accommodative interest rate policy of the central bank. It is thus safe to say that the RBI is not likely to push an aggressive rate hike stance if inflationary pressures are moderate. The rate hike and its stand on inflation are likely to help control the pressure on the rupee in the forex markets especially, when other Asian central banks have already acted to control things.

The move to deregulate savings and small deposit rates and NRI deposits is a welcome step. So also the decision to permit short selling in the G-Sec markets as this will, in due course, lead to better price discovery.

Further, expanding the screen-based platform to cover call and term money market will aid dissemination of prices and improve liquidity in the market.

The expansion of RTGS and setting up of NEFT and NSS and Cheque Truncation will improve payment systems and liquidity management and remove systemic risks.

The hike in the general provisioning on standard advances to 0.40 per cent from 0.25 per cent reflects the desire for protecting banks' balance-sheets while credit is galloping.

(The author is Chief Dealer — Money and Forex — UTI Bank Ltd, Mumbai.)

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