Ahead of the announcement of RBI's quarterly review of monetary policy, the FM expressed a view that's different from that of bank chiefs.
Chidambaram’s logic is that rates should ease along with inflation
NEW DELHI: Ahead of the July 25 announcement of the Reserve Bank’s quarterly review of monetary policy, finance minister P Chidambaram on Friday expressed a view that’s different from that of most bank chiefs on where interest rates are headed.
The minister expects interest rates to moderate while top bankers believe rates could move northwards. “Inflation is moderate and there is ample liquidity in the banking system”, Chidambaram told reporters after a meeting with chairman and managing directors of all 27 public sector banks here. “The logic is: if inflation moderates, interest rates will also moderate”, he said.
To a specific question as to whether RBI governor YV Reddy would follow the logic and signal a lowering of interest rates, Chidambaram said he did not wish to get into the Central bank’s domain. The RBI was the monetary authority and it was autonomous.
Many bank chairmen saw a distinct possibility of a hike in key short-term interest rates. They said pressure on interest rates continued and the RBI could, in policy review on Tuesday, hike repo and reverse repo rates by 25 basis points.
Oriental Bank of Commerce chairman KN Prithviraj said he expected the RBI to raise rates. He said interest rates were hardening as deposit growth was low and credit offtake high.
Canara Bank chairman MBN Rao said the market expected a 25 basis points increase in the repo rate, the rate at which the RBI injects liquidity into the banking system. Indian Bank chairman KC Chakrabarty said global interest rates and oil prices were also putting pressure on domestic interest rates.
The finance minister conceded that the market expected rates to harden, but that was because of inflationary expectations. He, however, claimed that there was no reason for anyone to expect prices to rise relentlessly.
Chidambaram said the latest data showed the inflation rate to be down to 4.68%. “This is moderate inflation for an economy that is growing at over 8%”. He said the government had taken steps for supply side management and the RBI had adopted monetary measures on the demand side to fight inflation. “Inflation will moderate”, he asserted.
In his meeting with bank chiefs, Chidambaram reviewed their performance. The review showed that the “banking system is in good shape and is getting stronger”. He asked banks to meet the credit needs of every section but top priority should be given to the productive sectors of the economy. “The aim is to keep the economic growth rate above 8%”. Credit growth has been over 30% for three years running and during the current year, too, credit offtake is growing at over 30%.
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