Easing of interest rates unlikely

Written by Chanda Kochhar | Updated: Oct 31 2007, 06:30am hrs
The policy announcements by the Reserve Bank of India in its mid-term review of credit policy have made efforts to maintain growth with stability. The policy continues with the Reserve Bank's stance of progressively developing the Indian banking system and the larger financial markets through measures aimed at enhancing efficiency as well as flexibility in operations.

While the CRR hike will have an impact on current liquidity levels, we expect overall liquidity conditions to remain favourable. In view of the CRR increase, the easing of interest rates in the banking system seems unlikely.

Also, it is a signal that we do have ample liquidity in the system. Going forward, the RBIs move will stabilise liquidity. Interest rate on lending as well as deposits will remain unchanged for some time in future.

The review recognises the increase in risks in global markets, the significant increase in international crude prices and the sustained high level of global food prices as an upside risk to inflation.

Developments in global markets will be important to the domestic macro-economic situation and limiting the effects of increase in any associated risks continues to play an important role in policy-making.

Measures to develop the bond, currency and derivatives markets like allowing cross currency options and commitment towards permitting market repos in the corporate bond market are a step forward in this regard.

Overall, the policy indicates the development of a healthy financial sector and a stable macro-economic environment. The policy seeks to guide the Indian economy on its high growth trajectory while adopting a watchful stance for indicators that may warrant regulatory action to mitigate systemic risk.

The author is joint MD, ICICI Bank