RBI likely to tighten credit policy

MUMBAI: Reserve Bank is likely to further tighten the monetary policy to achieve the twin objectives of containing price rise and preventing further increase in value of rupee, without sacrificing growth.

Containing inflation, which has exceeded RBI's estimate of 5 to 5.5 per cent for 2006-07, is expected to be the focus of the central bank's annual credit policy to be announced by the Governor YV Reddy on Tuesday.

The year-on-year inflation rate, according to the RBI's "Macroeconomic and Monetary Developments in 2006-07" released on Monday was 5.7 per cent on March 31, 2007 as compared to four per cent a year ago.

Apart from supply constraints, the inflation rate, which is being fuelled by sharp increase in money supply, mainly on account of high inflow of foreign exchange, has already crossed six per cent and may harden further in the absence of stringent fiscal and monetary measures.

The broad money supply which indicates stock of liquidity in the system, as per the RBI estimates, accelerated by 20.8 per cent at the end of March 2007 as compared to 17 per cent a year ago, while the foreign exchange reserves exceed $200 billion mark.

As regards foreign exchange stock, the inflow of invisibles increased to $40 billion during three quarters of 2006-07 compared to $28.1 billion during the corresponding period in the previous fiscal, reflecting sharp increase in export of services and remittances.