Monday, July 26, 2010

Will RBI target inflation or growth

Tomorrow is quarterly review of RBI monetary policy & it is expected to target inflation according majority of analysts.

Most analysts are expecting RBI to increase repo as well as reverse repo rate by 25 basis points & keeping CRR unchanged as liquidity is already tight in economy.

Some analysts are expecting repo & reverse repo to be increased by 25 basis points from present 5.5% to 5.75 & 4% to 4.25% maintaining present corridor (difference between repo & reverse repo) of 1.5%.

But Some analysts are expecting interests rate corridor to reduce by increase in repo by 25 basis points & reverse repo by 50 basis points there by reducing corridor to 1.25% from present 1.5%. to reduce the volatility in the interest rate.

If you see the following link

First graph you can see that credit is growing where as deposit growth is constant may be because of lack of increase in interest rates. And if you see the credit deposit ratio it has increased to 70 levels 74 levels which is surely an indication of an increase in interest rate in future.

But is it safe to increase interest rates as already IIP numbers slowing down & its merely double digit & where as inflation is concerned its mainly because food articles & public distribution system. And I think when you expect growth, with growth inflation will come by default (because of wage growth which int run leading to per capita increase leading to more expendable income) , so we should learn to live with it.

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