labels: rbi, economy - general, banks & institutions
High interest rate not to impact growth rate news
25 July 2006

In line with general expectations, the RBI has hiked the reverse repo and the repo rates by 25 basis points. But it has left CRR, and the Bank Rate unchanged. It's GDP growth forecast for FY07 is unchanged at 7.5-8 per cent. The inflation target for FY07 is also unchanged at 5.0-5.5 per cent.

Many believe that this is the end of the interest rate hike cycle and there could be no further hikes. But Saumitra Chaudhary, member of the prime minister's Economic Advisory Council differs. "Further hike will depend on the RBI's assessment," says Chaudhary.

However, Chaudhary doesn't believe that high interest rates will impact the economy's growth rate. He says that the growth witnessed in the last year and even this year is driven by investment and consumer side of the activities, hence interest rate hike will have less effect. CNBC-TV18 shares excerpts of its exclusive interview with Chaudhury with domain-b:

The rates have been hiked. But there is a certain indication that this is a pre-emptive hike and, henceforth, the monetary policy will not be unidirectional. What's your reading?
I don't know about the pre-emptive hike part of it. All I can tell you is that this is something everybody should have expected. If one looks at the monetary expansion that has happened in the last couple of years, it is very clear. If people keep on calculating or multiplying credit growth based on 31 March of 2006 and 18 March of 2005, they will get a wrong impression.

If we make that adjustment not only will we see credit growth, which was unusually strong last year, but also continues to be strong this year. So this is an obvious conclusion. In order to sweep money supply, rates have to be hiked.

What do you expect the impact to be on growth? Do you see growth continuing at 8 per cent in the current quarter?
The growth in the first couple of years, in the present expansion from 2002-2004, was primarily driven by consumer demand. That was not the case last year. I don't think that is the case this year too. So to that extent the impact of a tighter monetary policy working through the consumer demand is subdued.

However, it would not be accurate to state that monetary tightening can never be disassociated with some deceleration in growth. It will take off some points of growth. That is always the trade off between some amount of growth and some amount of inflation. If we are not sensitive to inflation then we can go for higher growth.

If one wants to curb inflation, basically curb the existing demand. So there will be an impact on growth. But as the growth now seems to be driven more by investment and consumer side of the activities, the effect will be less.

How do you look at interest rates hereon? We are looking at a GDP of 8 per cent perhaps M3 will be a little more than 15 per cent the targeted rate, it is running at 18 per cent at the moment, where do you see the rate hike scenario? Do you think that they are somewhere close to the end of the tightening cycle?
I think much would depend on the RBI's assessment of the circumstances. That is why I suggest that if you make the adjustments, you will see that even in this year in 2006-07, the credit growth in the first quarter up to July 8 is stronger than what it was last year.

So it is still very strong. It depends on what the RBI's assessment is. I would not say that this whole business would be put to sleep.

Are you going to say that you are going to be looking more for credit growth than really look at the external factor as oil prices?
No, at the end of the day, one cannot do anything about the external factor. But the credit growth is something that is certainly within the control of the monetary authorities. We have been looking at that March 17 or March 18 onwards numbers, which seem to indicate that the first quarter credit growth is actually subdued. But it is not. It is quite the other way round.

The credit growth in the first quarter of 06-07 is stronger than it was in 05-06. So, clearly higher interest rates don't seem to have put breaks on the credit growth. And, that is the story from individual banks, if we ask them. Their topline continues to grow.

also see : Policy may not lead to hike in lending rates: Janak Desai, ING Vysya
Update: Reactions to RBI rate hikes
Rate hike in line with expectations: V Srikanth, Citibank
Bond markts to view credit policy positively: Ajay Mahajan, Yes Bank
RBI rate hike largely expected: ICICI Bank: Kalpana Morparia, ICICI Bank
RBI has established a neutral rate: Subir Gokarn, CRISIL

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High interest rate not to impact growth rate