New Delhi: The Indian economy’s stellar performance in the second quarter of the current fiscal year has led to growing expectations that the Reserve Bank of India (RBI) will start pushing up interest rates by the end of 2009.
The central bank has made it clear in recent weeks that interest rates have bottomed out and its next move would be to tighten monetary policy. The only issue of debate is when and how.
The first move should be to tighten liquidity rather than raise policy interest rates. Banks are flush with funds and continue to park around Rs1 trillion of overnight money every day with RBI. A modest 0.5% increase in the cash deposit ratio would mop up around one-fifth of this excess liquidity.
That will be an adequate signal to companies and consumers about what they can expect in 2010. Stronger action is not called for till at least the Union budget, to be presented in February.
Remember: The full impact of the drought on output has yet not been felt and bank credit growth is still in the anaemic single digits.