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RBI has its task cut out

The Central bank may use both the tools available - repo rate and CRR - to reign in runaway inflation, which continued its sojourn in double digit level for the third week, reports BS Srinivasalu Reddy.

business Updated: Jul 06, 2008 22:44 IST
BS Srinivasalu Reddy

The Reserve Bank of India (RBI) may use both the tools available — repo rate (at which RBI lends banks) and Cash Reserve Ratio (CRR or a portion of deposits banks have to keep with RBI) — to reign in runaway inflation, which continued its sojourn in double digit level for the third week. But, RBI may not be in a hurry to raise the key rates before July 29, when first quarterly review of the annual credit policy is scheduled.

Economists feel, if repo rate has to be hiked, it will be 25 basis points (100 basis points is equal to one per cent) and if it is CRR hike, then it could be 25-50 basis points. A percentage hike in CRR sucks out about Rs 38,000 crore from the banks’ lendable resources. Repo rate hike signals overall upward direction to interest rates in the banking system, though it may not have immediate impact on inflation.

“Having given a strong dose (repo rate and CRR hiked by 0.5 per cent each on June 25) hardly a couple of weeks back, RBI may not be in a hurry to take another measure so soon,” said DK Joshi, director and principal economist of Crisil.

“Both repo rate and CRR may be hiked by 25 bps each in the policy. The (Government securities) market is already prepared for this,” said Abheek Barua, chief economist of HDFC Bank.

Rise in inflation moderated for the week ended June 21 at 0.21 per cent to 11.63 per cent, compared to 37 bps spiral to 11.42 per cent the previous week. “Inflation is expected to touch 12.5 per cent before receding in September. Imported edible oils are expected to reach the public distribution system (PDS) only by then,” said Sachchidanand Shukla, economist, Enam Securities.

"RBI may hike CRR by 25-50 basis points in the policy to bring down money supply, another factor influencing inflation," Joshi added.

Money supply growth was hovering above 20 per cent over the last two years despite RBI’s efforts to contain it between 17-17.5 per cent level. Accelerated government spending on agriculture loan waiver, sixth pay commission and subsidies is set to complicate things further.

But there is a hitch in hiking CRR immediately given the banking sector pressed for funds. “RBI may wait for sometime before raising CRR. Funds available with the banks should improve. Meanwhile, to send a strong message on interest rates, RBI may hike repo rate by 0.25 per cent,” Shukla added.