labels: rbi, economy - general, stock markets - india
RBI steps up fight on inflation with Repo, CRR hikesnews
Rex Mathew
30 March 2007

Concerned by the unrelenting rise in inflation, RBI has announced further increases in the repo rate and cash reserve ratio (CRR). While the repo rate has been increased by 25 basis points to 7.75 per cent with immediate effect, CRR would go up by 50 basis points in two steps next month.

The repo rate hike would make it more expensive for banks to borrow from the RBI and thereby would bring down liquidity in the system. The higher CRR would absorb Rs15,500 crore from the banking system and further drain out liquidity. Though liquidity was extremely tight and call rates shot up recently, sustained overseas inflows and higher government spending has somewhat eased the situation.

With inflation remaining steadfastly close to 6.5 per cent in recent weeks, markets were expecting such monetary measures from the central bank. As per the latest data released today, wholesale price inflation for the week ended 17 March remained unchanged at 6.46 per cent. "In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is critical to take demonstrable and determined action on an urgent basis", the RBI said in defense of its decisions.

More significantly, the RBI has chosen to drop its emphasis on managing inflation without hurting growth and is now ready to focus more on fighting inflation to achieve more stable growth. "At this juncture, it is important to reinforce the measures already taken for maintaining price stability and anchoring inflation expectations in order to sustain the growth momentum. The role of monetary policy is to maintain stability and so contribute to growth on an enduring basis", the RBI said in its statement released today.

"It is necessary to reinforce the emphasis on price stability and well-anchored inflation expectations with a demonstrated commitment in terms of credible policy monitoring and actions. The conduct of monetary policy should continue to demonstrate that inflation beyond the tolerance threshold of the Reserve Bank is unacceptable and that the resolve to ensure price stability is always backed by timely and appropriate policy responses", the RBI statement added.

The sharp rally in crude oil prices over the last couple of weeks has made the inflation outlook even grimmer. Though the government may not allow a retail price hike because of political considerations, the RBI has to consider costlier oil in its policy deliberations

Rising price levels has also become a hot political issue as the reverses faced by the Congress-led alliance in recent state assembly elections were attributed to costlier food and other essential items. With assembly elections due shortly in the key state of Uttar Pradesh, pressure on the government to step up its efforts to bring down prices has increased further.

The finance minister had indicated this week that the RBI might take further monetary policy steps to manage inflation. He had also stated that the government would be uncomfortable if inflation is above the range of 4 and 4.5 per cent. The RBI's target inflation range is between 5 and 5.5 per cent. However, there is a raging debate on the desirable inflation levels when the economy is growing at around 9 per cent per annum. Some economists, including some of the RBI's own advisors, are arguing that it would be difficult to limit inflation to such targets without affecting the growth momentum.

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RBI steps up fight on inflation with Repo, CRR hikes