The Hindu Business Line : Inflationary pressures may push up interest rates

THE RBI review indicates robust growth in the economy, expectation of inflationary pressures on account of continuing high oil prices, a widening current account deficit, and a possible asset-price bubble. In keeping with market expectations, the reverse repo rate has been hiked by 25 bps. However, the repo rate has also been hiked by 25 bps, thus keeping the 100 bps spread between repo and reverse repo.

On the positive side, GDP growth projections have been revised higher to 7-7.5 per cent from the projected 7 per cent. This is being led by momentum in the services and industrial sectors and expectations of a pick up in agricultural output based on a reasonably good monsoon. Consequently, non-food credit has shown a significant rise. However, of this, investment in infrastructure is still low.

On the inflation front, the Review says that it may be difficult to contain it at 5-5.5 per cent without "appropriate policy response". Clearly, this indicates expectations of inflationary pressures, and thus the need for monetary policy measures to contain the same. This is largely because of the steady rise in oil prices. Interest rates are thus likely to be on a firm uptrend. It will thus not be surprising if another rate hike is effected midway in keeping with the inflation trends.

Risks of global trends affecting domestic inflation and interest rates have been highlighted.

Concern has been expressed about rising asset prices, particularly in the housing and real-estate sector.

The emphasis of the monetary policy is on price stability, provision of adequate liquidity to meet genuine credit needs, an interest rate environment in keeping with the macroeconomic and price situations and responding to evolving circumstances so as to curb inflationary expectations.

Certain prudential measures relating to banks' capital market exposure limits have been outlined. Guidelines in this regard are to be issued separately.

Overall, the Mid-Year Review reflects strong, continuing growth trends in the economy and a reasonably stable liquidity and inflation positioncurrently. But the tone is firm on expectations of rising inflationary pressures and, hence, higher interest rates.

It also highlights the risks of global macroeconomic factors which could increase volatility and affect the domestic economy.

(The author is Group Head, Corporate and Institutional Banking, Kotak Mahindra Bank.)

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