Search Now

Recommendations

Friday, June 06, 2008

CRR hike coming ..?


Hinting at a possible increase in cash reserve ratio (CRR) or short-term interest rates, Reserve Bank of India (RBI) governor YV Reddy on Thursday said that the central bank would take all measures to curb inflationary expectations. “We are vigilant and ready to take recourse to conventional and unconventional measures required to anchor inflationary expectations,” Mr Reddy said on Thursday.

He also promised to make forex reserves available to manage oil stocks, but clarified that oil bonds would not get the SLR (or statutory liquidity ratio) status like government securities. The recently-announced oil bond repo, which would make it possible for oil PSUs to take short-term credit and foreign currency from the central bank, was part of the unconventional measures.

However, Mr Reddy made it clear that the policy space available to the central bank to tame inflation was limited. “The policy space available to RBI is basically confined to managing aggregate demand through money supply, interest rates, exchange rates and flow of credit through banks,” Mr Reddy said while speaking at the annual convocation of Acharya NG Ranga Agricultural University in Hyderabad.

The governor said that in India fundamental drivers of growth continue to be strong and the GDP growth is expected to be in the range of 8-8.5%. However, the situation was extraordinary in respect of oil prices and that the basic approach of RBI was to carefully manage liquidity conditions.

“We will continue to place highest importance on orderly conditions in the money, forex and government securities market,” said Mr Reddy. The governor also indicated that oil bonds were unlikely to get the status of bonds that qualify for meeting statutory liquidity ratio of banks. “We will maintain integrity of the SLR regime,” he said.

While oil prices were a worry, the governor saw encouraging signs on food prices.

He added that the turbulence in global markets had come down and there were signs of a move towards normal conditions. “Our markets have been orderly, and we do not expect contagion,” said the governor. Commenting on food prices, the governor said that the increase in food prices in recent months was only a fraction of what observed in other countries.

The current outlook for wheat appears positive with a significant improvement in production. Edible oil prices have seen some moderation in the current fiscal. Prospects for sugar also appear bright for the current year. On the current global price situation, Mr Reddy admitted that the current global food situation was a serious one and triggered by a host of factors, including high energy costs in advanced economies and turbulence in financial markets and financial institutions.

“There are several imponderables, especially relating to the path of future prices in oil, progress in restoring normalcy in the financial market, especially the currency market and the extent of the slowdown in the US economy and its impact on the world economy.

Further, food policies, especially diversion to bio-fuel, cross-border trading, subsidies and the use of buffer stocks would impact global food prices,” he said. But he expected foodgrains supplies to improve in a year or two. Back home in India, Mr Reddy underscored the need to augment food supplies within the country since marginal requirements or even perceptions of shortfall in domestic supplies can have significant influence on world prices. We have scope to raise productivity in agriculture and ensure food security at a minimum, he said.

via ET