The Hindu : Front Page : RBI concerned over inflation

Online edition of India's National Newspaper
Friday, Apr 29, 2005

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Front Page

RBI concerned over inflation

Special Correspondent

Bank rate and cash reserve ratio unchanged in credit policy for 2005-06

MUMBAI: Inflation and inflationary expectations emerged as the main concerns of the Reserve Bank of India (RBI) as it announced the Annual Monetary and Credit Policy for 2005-06. Inflation has been pegged on a point-to-point basis in the range of 5-5.5 per cent subject to the growing uncertainties, both in global oil prices and domestic absorption. The RBI placed the real GDP growth around 7 per cent. While announcing the policy, RBI Governor Y. V. Reddy said on Thursday, "Domestic factors dominate today and they ensure stability. Global factors point to risk." Oil, rising interest rates and currency imbalances were the external factors which would influence economic conditions in the country. "However, we are less vulnerable than others. We have cushions such as forex reserves and foodstuffs." The RBI also raised the key short-term interest rate (reverse repo) by 25 basis points from 4.75 to 5 per cent from April 29, to contain inflation and tackle excess liquidity. This is in addition to a similar raise in October last. Reverse repo is the rate at which the RBI borrows money from the market for a very short period against securities (or the rate at which banks park their funds with the central bank). Repo rates have emerged as an important monetary mechanism at a time when central banks the world over are depending on Open Market Operation. This is in preference to the more direct monetary mechanism of the Bank Rate and Cash Reserve Ratio (CRR) that have been used in India. This year's policy leaves the Bank Rate and CRR unchanged at 6 and 5 per cent. On the hike in reverse repo, he said this step was taken keeping in mind the overall monetary conditions. "The overall stance of the monetary policy would be to provide liquidity for credit growth and support investment. "

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