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Rate hike fears in India’s monetary policy review
Mumbai, Nov 1 (IANS/PTI):
Published on 2 Nov. 2010 12:52 AM IST
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The Reserve Bank of India (RBI) reviews its monetary policy for this fiscal Tuesday with high food inflation in the backdrop, even as industry and commercial banks hoped for status quo in policy rates, already tweaked five times in 2010.
RBI Governor D Subbarao will conduct the second quarterly review at 11.30 a.m. It will follow the presentation of a report on macroeconomic and monetary developments for the first two quarters a day earlier, the central bank said. The update comes when the overall annual inflation rate has fallen to 8.6 percent, but the 52-week rise in food prices is still in double-digit level of 13.75 percent, which policy makers at the government and the central bank have both termed a matter of concern.
Pranab Mukherjee today said inflation is a matter of concern, indicating that the Reserve Bank could take some steps to check rising prices at its mid—year monetary policy review tomorrow. “Inflation is a matter of concern. The main reason for the high level of inflation is food prices. Inflation (is expected) to further go down to a more acceptable level,” Mukherjee said at anIBA conference. The overall inflation for September was at 8.62 per cent, much higher than RBI’s acceptable level of 5-6 %. Food inflation, which is reigning in double digit for the past three months, is feeding the overall inflation numbers. Food inflation in mid-October stood at 13.75 per cent.
Mukherjee’s comment come just ahead of the Reserve Bank’s second quarter monetary policy review tomorrow, in which the central bank is expected to hike policy rates by 25 basis points to tame inflationary pressure. When asked about the possible rate hike action by the central bank, Mukherjee said, “Let us wait. RBI policy statement will be made shortly... I am in discussion with the RBI Governor.”
In the previous mid-quarter review September 16, the central bank had hiked its short-term borrowing and lending rates by 50 basis points and 25 basis points, respectively, continuing with its tight monetary policy stance since January to tame inflation. Accordingly, the repurchase rate stood revised to 6 percent from the earlier 5.75 percent, while the reverse repurchase rate was hiked to 5 percent from 4.5 percent in what was the first mid-quarter review of the policy for this fiscal.
This review had seen the fifth such rate hike since the apex bank decided to tighten its monetary policy in January-first on January 29, followed by another on March 19 and again on July 2 and then on July 27 -- to rein in inflation. Repurchase rate, often referred to as the short-term lending rate, is the interest the apex bank charges on borrowings by commercial banks. A hike in this rate increases the cost of borrowing for banks, discouraging them to hunt for more funds. Reverse repurchase rate, referred to as the short-term borrowing rate, is the rate at which the central bank borrows money from commercial banks.
A hike in this rate makes it more lucrative for banks to park funds with the central bank. This time, commercial banks and industry hoped the rates will be kept unaltered.

Yet, the central bank has hinted at some hike in policy rates.
“Persistent price increases in commodities for which there are less effective substitutes will raise the potential rate of inflation over a period. India’s challenge is to keep inflation under check,” said Deputy Governor Subir Gokarn.

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