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Reddy fans rate fears with studied silence

india Updated: May 11, 2007 05:40 IST
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The silence is ominous, if you listen to the static in the background.“Silence, silence, silence,” Reserve Bank of India governor Yaga Venugopal Reddy told reporters on Thursday after its board held a routine meeting amid the cool hills of Shimla, but chances are high that bankers and borrowers felt the heat across the nation.

Reddy’s words, used by peons in the colonial age to bring a hush into courtrooms, may well send a chill after the US Federal Reserve signalled overnight that inflation was a “predominant policy concern” while the Bank of England sounded more hawkish as it nudged up its benchmark rate by a quarter point to a six-year high of 5.5 per cent.

The Fed left its rate unchanged at 5.25 per cent and the European Central Bank also left its rate at 3.75 per cent, but clearly, the Western world’s three most key figures were in no mood to relent on money supply. That probably leaves Dr. Reddy with no feeling of being the odd one out.

The markets do not expect RBI to remain silent for long. They expect a quarter percentage hike in the repo (repurchase) rate as inflation continues to be range bound at 5.50 to 6 per cent whereas RBI has set stringent inflation target of five per cent for the current fiscal at 5 per cent.

The repo, the short term rate at which commercial banks borrow from the RBI, is a signal that banks do not ignore.“There is a possibility of another repo rate hike in the July review or even before that,” said Abheek Baura, chief economist ABN Amro Bank.

The RBI left its rates and the cash reserve ratio (CRR), the share of cash balances that banks keep with the central bank, unchanged after its review meeting on April 24.

But then, it had unexpectedly raised the repo rate to 7.75 per cent on March 30, when it also raised its CRR by 0.5 percentage points.

However, D K Joshi, principal economist at credit rater Crisil, said he could see no further rate hikes as he saw the RBI moving towards a “neutral zone.”