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RBI’s rate tightening measures may fructify

RBI’s rate tightening measures may fructify
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First Published: Wed, Apr 25 2007. 12 39 AM IST
Updated: Wed, Apr 25 2007. 12 39 AM IST
Mumbai: The Reserve Bank of India (RBI) probably anticipates that its aggressive rate tightening measures, in earlier quarters, will bear fruit. They are not rushing in to hike rates but they are keeping their options open depending on the situation. In the coming months, it is clear that they do expect inflation to go down. But if that does not happen, they are keeping open their options of tightening rates further. Going forward, they are going to look at the situation in totality, rather than by week- to- week data.
The signal the central bank seems to be giving is that they have been aggressive with rate hikes in the past. Now, they do not want to be over aggressive and dent growth prospects. They expect that the lagged effect of the rate hikes will seep in to the economy and the results will bbe visible in a few months.
The central bank also seems concerned that some inflation, such as for food products, is supply led. This is outside the RBI’s purview. This year’s budgert did address some of these supply side issues. If there are any temporary disruptions in the food supply chain, later in the year, then the RBI would have an option of whether to intervene or not.
The steps towards capital account convertibility are along expected guidelines. The RBI has maintained a policy of gradualism in making the the Rupee fully convertible and today’s steps are indicative of that.
The Rupee is at a multiple year high. This does make imports cheaper. There could be some pros and cons to this but if India is to move towards full capital account convertibility, you will have too deal with these things. The RBI seems to have a policy of gradual allowance with regard to the Rupee’s appreciation. They do seem to be loosening their grip a little bit.
We think that the measures to deepen the bond markets are very positive. Today’s steps that help bring liquidity and maturity to the bond market.
The RBI’s target of 8.5% for GDP growth is respectable, while it is lower than last year’s 9.2% growth. The central bank clearly has a mandate to promote sustainable growth given the price environment. They also have the twin goal of making sure there is no accelarated rate of growth and no overheating, in the economy.
While there were no hikes in this policy, the central bank will clearly keep a close watch on the day to day situation. They will evaluate their rate hike options depending on what each fresh set of data says.
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First Published: Wed, Apr 25 2007. 12 39 AM IST
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