Policy advisors consensus: dont hike rates

Written by Sunny Verma | Rituparna Bhuyan | New Delhi | Updated: Oct 15 2009, 06:55am hrs
The Centre appears to be leaning hard on RBI to continue the present interest rate regime. Days ahead of the central banks mid-term review of monetary policy, the governments policy advisors argued against any hike in interest rates, fearing it could derail the economys incipient recovery. RBIs review on October 27 will come in the backdrop of industrial output recording double-digit growth in August after a gap of 22 months, but expectations of inflation crossing 7% by March.

GC Chaturvedi, additional secretary in the department of financial services, ministry of finance, said the lending growth of public sector banks is reasonably good and that the government was in favour of continuing with the expansionary policy. Public sector banks have got good credit growth. There is no problem, he told FE. The banking division is part of the financial services department, which is the primary interface between the government and RBI.

Prime Ministers Economic Advisory Council chairman C Rangarajan said RBI is likely to keep rates unchanged, although it may tinker with liquidity. As far as monetary policy is concerned, it has followed an accommodative policy, and unless inflationary pressure is very strong, there may not be any change in stance, Rangarajan said. RBI may first stop buying bonds in open market operations and then look at sucking out excess liquidity from the system, he added.

Earlier, Planning Commission deputy chairman Montek Singh Ahluwalia had also maintained that the consensus at the G-20 meeting at Pittsburgh was that no country would withdraw expansionary monetary policy anytime soon.

On October policy, I do not expect any change, Indias chief statistician, Pronab Sen, told FE, stressing that it was too early for the government and RBI to roll back the fiscal and monetary stimulus. He also dashed the argument that excess liquidity was building up in the economy.

A liquidity overhang happens because of the mismatch in demand and supply. If demand for credit picks up, then the overhang itself will automatically vanish. What everybody is looking at is, you have a deposit growth of 20%, and a credit growth of 14%. The issue is not to lower the deposit growth. The issue is, can you increase credit growth, he told FE.

Sen, who is also secretary, ministry of statistics & programme implementation, said current credit growth was not great. If you are talking of (GDP) growth of 7-8%, then credit growth has to be somewhere between 20% and 22%, he said. In the first half of this fiscal, bank credit grew at its slowest pace in six years at 12.62% to Rs 28.73 lakh crore as of September 28, against Rs 25.51 lakh crore in the same period last year, according to RBI data.

RBI has cut its main lending ratethe repo rateby 425 basis points between October 2008 and April 2009 to 4.75%. It pared the reverse repo rate (the rate at which it sucks out excess liquidity) by 275 basis points to 3.25% in the same period. It slashed the cash reserve ratio, the slice of deposits banks need to keep with RBI, by 400 basis points to 5% between October and January.

A senior government official pointed out that RBI also has an option beyond raising policy rates across the board. The central bank could start with selective credit controls. CRR could go up first as it immediately drains excess liquidity out of the system, the official explained.

On Monday, Ahluwalia said there was no need to roll back the stimuli unless GDP growth comes back to 7%. The Planning Commission has projected GDP growth of 6.3% this fiscal. The monetary stance need not be changed as of now, he said. Finance Minister Pranab Mukherjee had said in late September, Withdrawal of the stimulus package will take some time. We shall have to wait as the government would like to watch the economys growth in the next couple of quarters.

Planning Commission member Saumitra Chaudhuri, however, said price stability was central to promoting investment. To get inflation under control in a situation where economic growth seems to be reviving, we cannot maintain a wide open monetary stance or a wide open fiscal stance, he told FE. The monetary stance is not a matter of government policy, it is RBIs stance and the governors already hinting at lighting up the exit lights, he added.