In the backdrop of highly disquieting global developments, the mid-quarter monetary policy announced on Thursday has decided to continue with the anti-inflationary stance till the headline inflation comes down to a comfort range of 5-6 per cent.

The March inflation is expected to be around 8 per cent, marginally lower than that of February.

The RBI has hiked the repo and reverse repo rates by 25 bps each with immediate effect to signal the continuance of its anti-inflationary stand.

Monetary transmission

Will the banks immediately transmit this hike on to its customers? The perception may be different for different banks depending on various factors.

However, at present, there are apparently no compelling reasons for the banks to act immediately. They may prefer to await market developments before taking a decision. A 25 bps hike in repo and reverse repo rates has largely been discounted in the market. The banks might also prefer to take a call on monetary transmission after the current fiscal.

Therefore, there may not be any immediate revision in deposit rates or retail loan rates. The year-on year non-food credit growth at 23 per cent in February remains above the indicative projection of 20 per cent for the current year.

DEPOSIT GROWTH

The divergence between credit and deposit growth has been narrowing since December, and both are projected to grow at a slower rate in the next fiscal. Deposit growth in the system up to February 25 was only 13.15 per cent with advances growing at 17.28 per cent. In the next fiscal, 2011-12 deposit growth is forecast at 17.9 per cent while advances growth is expected to moderate to 16.6 per cent.

(The author is CMD, Indian Overseas Bank.)

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