• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest
• The New Manager

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

D. Murali

Advertisement

Chennai Feb. 7 The decision to increase the repo rate by 25 basis points is clearly aimed at controlling inflation, targeted to remain within 5-5.5 per cent in the short run, while maintaining the trend towards a higher growth path.

Thus begins Dr Shanto Ghosh, Director and Principal Economist, Deloitte, Haskins and Sells, Mumbai, while discussing with Business Line the latest monetary policy review by the Reserve Bank of India.

The rate hike will inevitably increase the overnight call money and notice money rates, leading to higher bank lending rates, foresees Dr Ghosh.

"Given the banking sector's reliance on market sources for funding their asset base, this is also likely to increase the deposit rates with the banks."

Focus on increasing the repo rate suggests that the RBI considers domestic factors more important than international developments in fuelling inflation and credit growth, postulates Dr Ghosh.

Provisioning requirement

"The move towards increasing the provisioning requirement in respect of the standard assets of the banking sector from 1 per cent to 2 per cent is a move in the right direction to mitigate the increased default risk faced by the banking sector from the large volume of outstanding loans to the real estate sector and personal loans to individual households," he says.

The increased risk weight for banks' exposure to non-banking financial companiesto 125 per cent from the existing level of 100 per cent (accompanied by an increase in the provisioning requirement) is also a welcome step to address the growing concerns of excessive bank lending, according to Dr Ghosh.

Lending impact

"Citing increased lending against non-resident and foreign currency deposits with the banks, the RBI has reduced the interest rate ceilings on NR(E)RA and FCNR(B) deposits by 50 basis points and 25 basis points, respectively."

What will be the impact of this move? Impact is likely to be marginal, at best, though there can be slower growth in foreign currency deposit within the banking sector, says Dr Ghosh.

"Overall, the effectiveness of this policy can be gauged on its impact in controlling inflation by stemming demand factors that is `overheating' the economy," he concludes.

Related Stories:
RBI hikes repo rate by 25 bps

More Stories on : Credit Policy | Interview

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
RBI intervention impacts rupee

Copyright © 2007, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line