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Thursday, May 31, 2007

Reddy, Steady, Stop!


After hiking the repo rate five times since June 2006 and Cash Reserve Ratio (CRR) three times since December, the wisdom of supply side inflation finally dawned on the RBI Governor Y. V. Reddy. The monetary policy announced by RBI on April 24, 2007 was met by sighs of relief from consumers along with rejoices from the bankers. This time around, Reddy refrained from hiking repo, reverse repo rates and CRR; throwing the ball in P. Chidambaram’s court, as Inflation is still above the 6% mark. Apart from tackling the issue of inflation, RBI also expressed concern over rupee appreciation which is stronger by almost 6% since March and is a serious issue for India’s exports, especially for the IT companies.

Aimed at restricting further appreciation of rupee, RBI announced a number of measures to lower the inflow deluge, encouraging money to flow out of India. Some of them are: Overseas investment limit (total financial commitments) for Indian companies has been enhanced to 300% of their net worth, listed Indian companies' limit for portfolio investment abroad in listed overseas companies has been enhanced to 35% of their net worth. Also, the present limit for individuals for any permitted current or capital account transaction was increased from $50,000 to $100,000 per financial year in the liberalised remittance scheme.

However, the question is: What about the consumers who bore the brunt of overnight hike in interest rates and paid more for their loans? Will they get some relief if rates stabilise?

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Source :
IIPM Editorial, 2007

IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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