The RBI will hike interest rates in a calibrated way, given the cash shortage in the economy and risks to growth posed by Europe?s debt crisis, said governor Duvvuri Subbarao on Friday.
Addressing reporters on the sidelines of a conference hosted by the Institute for Development and Research in Banking Technology, Hyderabad, Subbarao said the repo rate of 5.25% would be the operative rate for the next few weeks.
?With inflation getting more generalised and demand-side pressures building, a calibrated exit from the easy monetary policy remains the Reserve Bank?s stance for now,?? he said.
?We must do a calibrated exit from the expansionary stance that we had taken during the global economic crisis,? he noted. The headline inflation unexpectedly accelerated to 10.16% in May.
Subbarao signalled RBI has to contend with the fallout from Europe?s debt woes and a cash squeeze in the banking system even as it tries to curb inflation. The cash crunch has resulted in ?some automatic tightening? in borrowing costs, Subbarao said.
On interest rate, the RBI governor said the central bank was in favour of deregulating interest rates on savings accounts. ?Deregulation of interest rates (including savings rates) is an important way forward for reforms. The base rate system that would come in to affect from July 1 is also an important reform method,? he said adding that the concerns expressed by banks on the issue should be debated. Currently, the savings rate is fixed at 3.5% and is being calculated on daily basis from April 1.
While maintaining that double-digit inflation is a cause for concern, Subbarao said the central bank would revise upwards its inflation projection for the year in view of the continued increase in prices of commodities and food articles. ?Inflation is expected to continue in double-digits till March 2011,? he added.
?Earlier, we expected the inflation rate to come down to 5.5% by March 2011. We will revisit that number in the July policy meeting.? RBI has increased the central bank?s benchmark rates twice since mid-March by a quarter percentage point each time. The reverse repurchase rate is 3.75%. The next monetary policy announcement is scheduled for July 27.