CREDIT POLICY- INDIA & THE WORLD
Central banks in the world have continued with aggressive rate hikes. After 15 consecutive hikes over two years, the US Fed Reserveâ€™s benchmark rate now stands at 4.75%. It is expected to raise it at a policy-setting meeting in June. Skyrocketing oil prices have shaken the European Central Bank enough to jack up its key rate twice since December to 2.5%, after holding it at a historical low of 2% for two-and-a-half years
Explosive growth in credit based consumerism and runaway asset prices, mainly of homes and equities, appear to be driving the Central Bank (RBI) of India into a corner as it tries to keep a lid on inflation and at the same time not cramp money flow for investment and growth. The Chief of the Central Bank (governor) is in for a tight balancing act said an MD of a private sector bank.
Reviewing of the credit policy at the commencement of 2006, the Chief (RBI, governor) was satisfied with the effects of earlier policy measures had on the economy in general, and prices and credit in particular.
Contrary to the optimism expressed about the effects the governor increased short-term interest rates as an acknowledgement of hardening global rates and to curb reckless lending to home buyers and equity investors.
During the last quarter of 2005 against the backdrop of uncertain oil prices and flaring domestic realty prices there was reluctance in raising the interest rates. Raising rates now appears to be back to square one.
Interest rate hikes diminish Indiaâ€™s attraction as a high-return investment destination. It means the country has to keep its rates higher to continue attracting even fickle portfolio investments that have been funding its current account deficit.
A sharp hike in domestic rates will put the brakes on the economy growing briskly at 8% annually. Increased consumption and a boom in housing have increased the per capita indebtedness of Indians.
While public savings growth rate has inched up to 29.1%, household saving rate has declined by 1.5% points, perhaps indicating a gradual shift towards credit-based consumption. Meanwhile, industries are expanding at breakneck speed; requiring large amounts of cash in the form of debt. The situation becomes even more complex as input prices of most industries have risen substantially.
Considering easing liquidity condition in the market the governor could defer a rate hike. Going by official inflation data a rate hike is not justified, said the chairman and MD of a public sector bank. Inflation rate for the week ended April 1 stood at 3.51% well under the RBI estimate of 5%-5.5% for the financial year 2005-2006.
A rate hike could impact the government borrowing programs, the chief of a state-owned bank said.