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Rate hike fears in India's monetary policy review

business Updated: Nov 01, 2010 11:21 IST

IANS
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The Reserve Bank of India (RBI) reviews its monetary policy for this fiscal on Tuesday with high food inflation in the backdrop, even as industry and commercial banks hoped for status quo in policy rates, already tweaked five times in 2010.

RBI Governor D. Subbarao will conduct the second quarterly review at 11.30 a.m. It will follow the presentation of a report on macroeconomic and monetary developments for the first two quarters a day earlier, the Central Bank said.

The update comes when the overall annual inflation rate has fallen to 8.6 percent, but the 52-week rise in food prices is still in double-digit level of 13.75 percent, which policy makers at the government and the Central Bank have both termed a matter of concern.

Ahead of the review, Finance Minister Pranab Mukherjee also hoped the Central Bank would strike a balance between the twin-needs to sustain growth and tame inflation - as both were of equal importance for the average person.

"High inflation has affected family budgets. Prices of food items like vegetables, rice, wheat and pulses remain a big concern," the finance minister told the annual Economic Editors' Conference in New Delhi last week.

"The government has taken measures both from supply and demand sides to control high inflation. On the supply side, the Reserve Bank has taken measures to curtail excess liquidity," he said.

"But we can't create liquidity crisis," Mukherjee said. "Sometimes you can't control the prices, but mitigate the adverse impact on affected people. We are providing food at subsidies prices. The Reserve Bank has taken suitable measures."

In the previous mid-quarter review Sep 16, the Central Bank had hiked its short-term borrowing and lending rates by 50 basis points and 25 basis points, respectively, continuing with its tight monetary policy stance since January to tame inflation.

Accordingly, the repurchase rate stood revised to 6 percent from the earlier 5.75 percent, while the reverse repurchase rate was hiked to 5 percent from 4.5 percent in what was the first mid-quarter review of the policy for this fiscal.

This review had seen the fifth such rate hike since the apex bank decided to tighten its monetary policy in January-first on Jan 29, followed by another on March 19 and again on July 2 and then on July 27 - to rein in inflation.

Repurchase rate, often referred to as the short-term lending rate, is the interest the apex bank charges on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for banks, discouraging them to hunt for more funds.

Reverse repurchase rate, referred to as the short-term borrowing rate, is the rate at which the Central Bank borrows money from commercial banks. A hike in this rate makes it more lucrative for banks to park funds with the Central Bank.

This time, commercial banks and industry hoped the rates will be kept unaltered. "We hope RBI to maintain status quo on rates, as it can hurt loan demand during the festive season," said Central Bank of India Chairman S. Sridhar, while all three apex chambers had hoped there will be no more tightening of policy.

Yet, the Central Bank has hinted at some hike in policy rates. "Persistent price increases in commodities for which there are less effective substitutes will raise the potential rate of inflation over a period. India's challenge is to keep inflation under check," said Deputy Governor Subir Gokarn.