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Calibrated policy exit: RBI guv

The Reserve Bank of India will exit from its relaxed policy at a “calibrated” pace, the governor said on Friday, remarks which sowed doubts about an early interest rate rise.

india Updated: Jun 18, 2010 21:26 IST

The Reserve Bank of India will exit from its relaxed policy at a “calibrated” pace, the governor said on Friday, remarks which sowed doubts about an early interest rate rise.

Pressure has been mounting on RBI after the wholesale price index rose to 10.16 per cent in May, the highest level in the G20 group of leading economies.

“We must do a calibrated exit from the expansionary stance that had been taken during the crisis,” RBI Governor Duvvuri Subbarao said.

The benchmark 10-year bond yield dipped 3 basis points immediately after the comments. “Altogether the statements were comforting inflation concerns are keeping yields from falling further,” said S. Srikumar, manager of fixed income at Corporation Bank.

Subbarao acknowledged that supply-side inflation was spreading and demand-side pressures were building up.

He said the RBI is watching growth and inflation as well as the situation in Europe and the domestic liquidity situation.

“The effective rate has moved up from the reverse repo rate which is at 3.75 per cent to the repo rate which is at 5.25 per cent. So some automatic tightening has taken place,” he said.

Subbarao said RBI would revisit its end-March 2011 inflation forecast of 5.5 per cent in the July 27 review after the March wholesale inflation rate was revised up to 11.04 per cent, well above its estimate.

He added that liquidity has become more comfortable, but traders said a clear picture will emerge only when local banks report their latest cash holdings.