Mumbai: Leading economists have welcomed the measures initiated by the Reserve Bank of India (RBI) on Tuesday in reining soaring inflation saying that the price rise has become a much serious and larger issue.
Describing the annual monetary policy announced by RBI governor D. Subbarao as a progressive one, Ernst & Young India’s Ashvin Parekh said “We have almost reached a point where inflation has become unmanageable and RBI has clearly indicated that bringing down inflation to a comfortable level is its top priority.”
RBI has pegged GDP growth rate for the current fiscal at 8% against the government’s projection of 9% whereas the economy grew by 8.6% in 2010-11.
This is clear from the governor’s call to the government to bring down the subsidies on oil and fertilizers, failing which the apex bank may propose another rate hike in the July policy announcement, he said.
The RBI on Tuesday raised its policy rates of repo and reverse repo by 50 basis points each to 7.25% and 6.25% respectively.
Repo is the rate at which RBI provides credit to banks while reverse repo is the rate at which the banks park money with the apex bank.
The RBI also asked banks to hike the savings bank rate by 50 basis points to 4% so as to provided relief to depositors from inflation.
This is the ninth time since March, 2010, that the RBI has hiked the key rates as part of its efforts to cool down high inflation.
Fitch Ratings India’s DK Pant opined that as inflation has been adamantly high all these months, RBI has taken a right step to yank it down by compromising on growth, which is already visible from past many months’ factory output data.
On the impact of the 50 bps hike in savings rate on the cost of funds for banks, Pant said, considering that on an average 30% of a bank’s total funds are in savings and current accounts (Casa), Tuesday’s hike will translate into a 15 bps escalation in the cost of funds for the bank.
Crisil chief economist D. K. Joshi said, “Policy basically reflects that inflation is a much larger problem as RBI’s efforts in controlling it have not had the desired effect. We have come to a stage where managing inflation is more important, even at the cost of sacrificing growth.” But he quickly added that the failure was also partly driven by supply-side inefficiencies.
He further said innovative steps like move to a single policy rate and the new borrowing facility for the banks in the form of the marginal standing facility will help fasten the monetary transmission process by further curbing demand.
Parekh of Ernst & Young India also said that newly introduced marginal standing facility is an innovative step to contain volatility in the call money market. Ideally, the call money rates should move with the repo and reverse repo rates. So is the move to single policy rate as well as increasing the interest rate on savings rate, he added.
On the apex bank’s call to government to cut oil and fertilizer subsidies as a fiscal measure to contain inflation and its probable cascading effect on inflation, Pant said oil price hike will have some impact on inflation but it will be offset if the monetary transmission takes its full effect following the steepest hike RBI effected on Tuesday on its policy rates as it will help contain demand.
The economists have also said that their agencies would soon be revising downward their GDP growth projections.