Rama Krishna Vadlamudi, BOMBAY April 17, 2010
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
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"Borrower of the First Resort"
Reserve Bank of India had continued with its accommodativepolicy till the end of January 2010 when it raised the country’s cashreserve ratio (CRR) by 75 bp to 5.75 per cent. It was followed upwith a 25 basis point hike each in both repo and reverse repo ratesat the end of last month. But despite that, During the first week ofApril, banks kept around Rs 1,00,000 crore daily with the RBI andthis has now come down to a daily average of about Rs 50,000crore – which means RBI is borrowing money from banks for short-term and it has become a Borrower of First Resort – and what atransition from lender of last resort to borrower of first resort!
Reserve Bank of India is coming out with its Annual Policy (monetary policy) for the year 2010-11 on April 20, 2010. Only three weeks back, RBI had given a strong signal regarding its strong intentions to control inflationary expectations by raising the repo and reverse repo rates by 25 basis points each to 5 and 3.50 per cent respectively. In the month of January, it raised CRR (cash reserve ratio) by 75 basis points to 5.75 per cent. In this background, it is very interesting to predict what actions RBI will take to keep the economy on even keel balancing between containing inflation and sustaining reasonable growth. Let us discuss the expectations from the RBI’s monetary policy for 2010-11.
Till January, RBI continued with its accommodative policy for around 18 months in thewake of financial turmoil that roiled the markets severely. Despite steep hike in CRR andwithdrawal of other measures, there is still huge liquidity in the banking system.Reserve Bank of Australia raised its benchmark interest rate by 25 basis points to 4.25per cent in a meeting early this month. The US had raised its discount rate by 25 basispoints to 0.75 per cent in February this year for the first time in more than a year. Chinais also raising its cash requirement ratios regularly since January 2010.
For the month of January of this year, inflation based on wholesale price index (WPI)was 8.56 per cent. But, in two months it has gone up to almost 10 per cent. Thisindeed is a very sharp increase in inflation. Even, food inflation is still around 17 percent. How the South-West Monsoon will play out remains to be seen. Fuel priceswere raised at end February. Whether fuel prices will be raised further by theGovernment, as world crude oil prices had shot up to USD 87/barrel on the Nymex,has become a big speculative point in the markets of late. Even though crude priceshave come down to less that USD 83 per barrel, the sharp rise in crude prices is amatter of concern to the Government in bridging fiscal deficit in the current year.