Money & Banking

‘Rate hike signals more tightening’

Our Bureaus Hyderabad/Mumbai | Updated on January 26, 2011

With the rate hike, the RBI has signalled further tightening of monetary policy and its intention to check the inflation. However, the hike was expected and the markets have already geared up to factor in the increase. As far as the impact on liquidity is concerned it is a function of demand and supply, according to Ms Renu Challu, Managing Director, State Bank of Hyderabad.

According to Dr Rupa Rege Nitsure, Chief Economist, Bank of Baroda, While current inflation scene required an aggressive tightening by the RBI, the lingering liquidity tightness has made the path quite tough for the central bank and it had to settle with a 25 bps hike in the key policy rates. However, another 25 bps hike in the February review is expected to create sufficient pressure on banks to raise deposit and lending rates in line with their existing liquidity profiles and credit demand.

The RBI's aim is to push up the real interest rates so as to induce household savers to put more and more money into bank deposits and at the same time, encourage entrepreneurs to use capital more prudently. The RBI is seen frontloading the rate hikes in January-March 2011 quarter, as in the next financial year, there will be limited room because of the expected large size of government borrowings with no windfall gains like 3G and BWA spectrum auctions.

The policy document clearly delineates the factors over which the RBI has a direct control in inflation management and the factors where government has to play an active role in removing a number of structural rigidities. The message is unambiguously clear. A more coordinated and cohesive action from different policymakers is a must if India has to settle on a sustainable high growth path.

Published on January 26, 2011

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