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FM sees no jump in key rates before July.

RBI may step in to curb inflation after first qtr credit policy review

UNION FINANCE minister Pranab Mukherjee does not see the Reserve Bank of India ( RBI) raising policy interest rates before the first quarter review of credit policy scheduled for July 27. A senior RBI official also concurred with this view on Monday.

On the possible rate hike by RBI in the next few weeks due to inflation arising from the fuel price hike, the Union minister said, " It is left for RBI to decide in the last week of July." Despite the hike in petroleum prices, inflation as measured by the wholesale price index ( WPI) is expected to start moderating from mid- July and would end the fiscal ( 2010- 11) at a moderate level, Mukherjee said.

The minister was addressing the media after participating in the western regional meeting on credit flow, in which chief ministers or ministers representing states of Maharashtra, Rajasthan, Madhya Pradesh, Chhattisgarh, Goa and the Union territories of Dadra, Nagarhaveli, Diu and Daman and bank chiefs interacted.

Credit flow to various sectors, including agriculture and education sectors, at reasonable rates were reviewed at the meeting. Financial inclusion, literacy and bank support for implementation of the government schemes targeted at the weaker sections also came up for discussion.

While responding to a query after the meeting, K.C. Chakrabarty, one of the four deputy governors of RBI, said the possibility of policy rate hikes before the policy review date of July 27 was very low, even after the hike in petroleum prices that are set to boost the inflation rate in the next few weeks.

"Possibility is there. But whether it will happen or not I do not know. We will continue to monitor this (inflation expectations), but probability of rate action before policy is very low," Chakrabarty, who is not directly involved with policy rate hike decisions in RBI, said.

Economists and banks wide expect the RBI to raise policy rates on July 27 during the policy review. It hiked rates -- repo (at which it lends to banks) and reverse repo (at which it pays banks on their overnight deposits) rates -- by 25 basis points in March and again in the month of April.

A Citigroup report, however, said RBI may wait for a few weeks before raising policy rates to contain inflation in view of tight liquidity in the system as well as the global economic uncertainty.

The minister said the fuel price hike would impact WPI inflation by 0.90 per cent on the upside. " Besides, rise in transportation costs would also result in increase in prices of essential commodities. Despite that, we had to bite the bullet as many newspapers had said," Mukherjee quipped.

The Centre plans to use the proceeds from third generation ( 3G) telecom auction funds to cut down its fiscal deficit that had mounted in the wake of the stimulus packages of 2009. But the Centre did not benefit from the fuel price hike, the FM said.

Bankers' buzz on new base rate

Bank chiefs are bracing for implementation of the new ' base rate' based lending rates from July 1, 2010.

State Bank of India ( SBI) chairman O. P. Bhatt said that his bank was likely to peg its base rate below eight per cent, while other public sector banks see their base rates to be in the range of 7.75- 8.5 per cent.

Oriental Bank of Commerce ( OBC) chairman C. Y. Prabhu has given a range of 7.75- 8.25 per cent as base rate for his bank, while Bank of Baroda chairman M. D. Mallya sees it to be in the range of 8- 8.5 per cent for his bank.

Under the new mechanism, the banks are not allowed to lend to anybody or institution below their base rate, which is the cost of funds and the minimum operational costs of the bank.

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Publication:Mail Today (New Delhi, India)
Date:Jun 29, 2010
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