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Interest rate may resume climb

With the annual inflation rate hits a three-year high of 7 per cent, all attention is now on the Reserve Bank of India, reports MC Vaijayanthi.
Hindustan Times | By MC Vaijayanthi, Mumbai
UPDATED ON APR 04, 2008 11:32 PM IST

With the annual inflation rate hitting a three-year high of 7 percent, all attention is now on the Reserve Bank of India. Will the central bank hike the cash reserve ratio (CRR) — the amount of money banks keep with it against their deposits — is the foremost question. We now expect monetary policy to tighten, with the RBI increasing rates by 50 basis points in April to primarily arrest inflationary expectations said the weekly inflation report from Goldman Sachs Economic Research. A hike in the CRR increases the cost of money for banks, forcing them to lend at higher rates.

The RBI has tightened money supply through the CRR to curb demand and bring down asset prices between December 2006 and November 2007 — from 5.5 per cent to 7.7 per cent. The other instrument the RBI uses to signal higher interest rates, the repo rate-—the rate at which banks borrow money from the RBI — was hiked six times, from 6.5 per cent in January 2006 to 7.75 per cent in March 2007.

"I am waiting to see if the RBI will innovate," said Manju Ghodke, chief economist at Larsen & Toubro. She said hiking interest rates could lead to a further slowdown in industry.

RBI Governor Y V Reddy had earlier this week said inflation was unacceptably high and the central bank was in full readiness to take appropriate action.

The cental bank has a scheduled policy meet on April 29 and there is a feeling that it can afford to wait till then to announce a decision.

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