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Survey points to 7% inflation, tighter monetary measures

Survey points to 7% inflation, tighter monetary measures
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First Published: Tue, Feb 27 2007. 11 32 PM IST
Updated: Tue, Feb 27 2007. 11 32 PM IST
Mumbai: The government, like the banking regulator, wants a slowdown in commercial banks’ loan portfolio. The Economic Survey 2006-2007, tabled in Parliament on Tuesday, admits that both credit as well as money supply as proportion to India’s gross domestic products (GDP) are low by international standards and they will continue to grow at a faster pace than GDP but “it is unlikely that they will grow as fast as they have in the recent past”.
Credit growth of India’s banking sector has been 30% over a similar rate of growth last two years while money supply growth has been over 21%, much higher than the annual projection made by the Reserve Bank of India (RBI), the country’s central bank. RBI has hiked its short term policy rates four times in financial year 2006-07 and raised banks’ cash reserve ratio twice to stem the credit growth that has been fuelling inflationary pressure.
The wholesale-price-based inflation rose to 6.73% early this month against RBI’s annual projection of 5-5.5%.
“Not surprisingly, the focus of the Economic Survey is inflation. For the banking system it means that liquidity must be kept under control. However, in April, the banking system is expecting the liquidity to return, backed by increased government spending. In this scenario, it is uncertain how RBI is going to check liquidity. If no announcements pertaining to duty cuts are made in the Budget on 28 February, it may mean another rate hike is round the corner,” says A. Prasanna, vice-president of ICICI Securities that sells government bond.
Ananda Bhowmick, senior director of rating agency Fitch Ratings, says: “The Economic Survey indicates that the inflation is going to be in the range of 7%. Considering the fact that RBI has kept headroom between 5%-5.5%, it could mean the central bank will have to continue with a tight stance on monetary policy over the next 12 months.”
The Survey points out that the continued mismatch between credit and deposit growth had also hardened interest rates despite ample liquidity. The credit-deposit ratio has continued to grow during the current year and was 74% on 19 January 2007, compared with 70% in the corresponding period of the previous year.
The Survey recognizes the challenge of reconciling the needs of facilitating credit for growth on the one hand and containing liquidity to moderate inflation, on the other. It suggests that a balance needs to be struck between taming inflation and maintaining the pace of growth. It has said that there is a need for integrating the rural sector, especially agriculture, with the organised financial sector to arrest rising prices.
Provisional data on sector deployment of non-food credit for the first half of 2006-07 indicates the continuation of the trend of broadening outreach of such credit across various sectors. On 29 September 2006, year-on-year increase in agriculture and allied activities was Rs46,333 crore (33%) and in industry—large and medium—was Rs98,274 crore or 24.3%. On a year-on-year basis, housing loans and loans for real estate continued to expand at a faster rate of 37.3% and 97.1%, respectively.
A continuous growth of bank credit and not-so-fast growth in bank deposits, according to the Survey, has put pressure on both deposit and lending rates. By 19 January 2007, rate for deposits of more than one year maturity at major banks was 7.25-8%, up by about 2 percentage points from a year ago. Since then, the deposit rates have gone up further and most of the banks are now offering 9% interest rates on deposits over one year.
Senior bankers even expect the government to take a relook at the small savings rate in the Budget. “I will not be surprised if the finance minister hikes the small savings rate,” says the chairman of a public sector bank who does not wish to be named.
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First Published: Tue, Feb 27 2007. 11 32 PM IST
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