The Reserve Bank’s latest act in a tightrope walk between growth and inflation is a tricky one, and there are indications that growth may get hurt because fears of a rate hike are not over despite a pause in a year-long money tightening drive.
Trying to maintain a balance between taming inflation and easing liquidity, the RBI left its key policy rates (repo and reverse repo rate) unchanged in the mid-quarter review of monetary policy on Thursday, while announcing liquidity easing measures to pump more cash into the system.
Experts say that this policy is more towards addressing the liquidity and inflation and growth may get impacted.
“When inflation is a concern, then growth gets slowed down. However, the deposits are expected to rise with the current hike in deposit rate by banks and the credit growth in the economy is also picking up,” said DK Joshi, principle economist at credit rating firm Crisil.
“The very hawkish tone of today’s statement has persuaded us that the next repo and reverse repo rate hike is most likely to come at the RBI’s next meeting on January 25,” Reuters quoted Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, as saying.
RBI said, “To sum up, the underlying growth momentum of the economy remains strong.”
RBI maintained that the current developments reinforce its real GDP growth projection of 8.5% for 2010-11 which it will revise in January.
On the liquidity front, the regulator cuts banks’ statutory liquidity ratio by 1 percentage point to 24%, effective December 18. Banks will also now get additional liquidity support up to 1% of their net deposits as against 2% earlier.
“Though inflation has come down in past few months, it is still above the comfort level of 5-6%,” said M Narendra, CMD, Indian Overseas Bank.