RBI may go for more monetary tightening

RBI may go for more monetary tightening
PTI
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First Published: Tue, Jun 03 2008. 11 02 PM IST
Updated: Tue, Jun 03 2008. 11 02 PM IST
New Delhi: With inflation crossing the 8% mark, the Reserve Bank of India (RBI) may consider further monetary measures to bring the prices down, global rating agency Moody’s said in a report.
“Given that the Indian economy still appears healthy, the RBI may consider further monetary tightening to cool inflation, which is a threat to social stability,” Moody’s economist Sherman Chan said in a statement.
Against the central bank’s tolerance level of 5% for 2008-09, inflation for the week ended 17 May stood at 8.1%.
In a bid to arrest rising prices, RBI had already raised cash reserve ratio (CRR) to 8.25% last month, to suck out around Rs27,000 crore from the system. CRR is the proportion of a bank’s total deposits that it has to keep with RBI, thus limiting the amount of funds it can use to lend.
RBI governor Y.V. Reddy in a speech last week had described the rise in the inflation rate as “totally unacceptable” as it affects the poor instantly.
According to US-based investment bank Lehman Brothers, “the dilemma between rising inflation and slowing growth will continue and we expect the central bank to tighten monetary policy using CRR hikes rather than repo rate hikes”.
Lehman Brothers expects another 100 basis points of CRR hikes during the course of the year, with unchanged repo and reverse repo rates.
The repo rate is the rate at which RBI lends to banks, injecting liquidity into the system, and the reverse repo rate is the rate at which it allows banks to park funds with it, sucking out liquidity.
Another global financial service provider, Barclays Capital, also holds a similar view.
“We expect the RBI to continue withdrawing liquidity via cash reserve requirement hikes of at least 25-50 basis points within the next few months,” Barclays Capital said in its emerging market research.
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First Published: Tue, Jun 03 2008. 11 02 PM IST