YV Reddy hints at higher interest rates

RBI will play its part in moderating and managing demand so that pressures on prices do not intensify, said Reddy.

Interest rates would go up further and Reserve Bank of India (RBI) would definitely move towards further monetary tightening to control inflation is the indication financial markets got from governor YV Reddy’s speech in Pune on Monday.

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The government has taken measures to control prices by managing the supply of products and RBI will play its part in moderating and managing demand so that pressures on prices do not intensify, said Reddy.

“His stance was already hawkish. At least this year, rates are only going to go up,” said DK Joshi, principal economist, Crisil. In calling upon financial market participants to participate in RBI’s demand curbing exercise, the central bank has probably hinted that bank should keep their interest rates moving in tandem with RBI, Joshi said.

After RBI hiked the repo rate (rate at which RBI lends money to banks) by 25 basis points, from 7.75 per cent to 8.00 per cent on June 11, most banks had revised their lending and deposit rates. Banks anticipate a further hike in the repo rate as well as another 50 basis point hike in cash reserve ratio (the money banks have to keep with RBI on its deposits), from 8.25 per cent to 8.75 per cent.

The bond market interpreted Reddy’s speech first to mean an increase in interest rates, but not an immediate and harsh one. “Since RBI takes pre-emptive action and has already moved in anticipation of higher inflation, there was no panic reaction to the governor’s speech,” said Harihar Krishnamoorthy, head of treasury, Development Credit Bank.