Inflation: RBI not to lower its guard

NEW DELHI: The interest rates on borrowings, especially on home loans, which had firmed up slightly following the anti-inflationary monetary steps by the RBI, could be southward bound again, analysts say.
The government has already let it be known that it would like banks to be more efficient and lower their spreads (the difference between their interest income and interest spending) which are still high.It is expected that the RBI could pressure the banks to cut the spreads through its monetary policy for 2005-06 to be announced next month. There could be efforts directed at removing certain systemic rigidities which work against lending rates being lowered.
As was evident from Saturday''s post-budget meeting of its board with finance minister P Chidambaram, the RBI is not expected to lower its guard against inflation. In fact, the FM conveyed to the RBI that the government attached the highest importance to maintaining price stability.
To the extent that inflation has ceased to be a cause for anxiety, the RBI could adopt a monetary policy with a bias for soft interest rates that would nurture the incipient investment boom in infrastructure, industry, housing and services. The RBI policy could lower its bank rate (that is the rate at which the RBI lends to banks) and signal the banks to cut their lending rates.
A cut in the bank rate was unthinkable in November, when the RBI last revised its monetary policy. The inflation was ruling above 7.5%, well over the bank rate of 6%. In fact, inflation had rendered return on saving schemes negative. The RBI thus adopted a policy stand in favour of maintaining interest rates. It left all rates unchanged and, in fact, increased the reversed-repo rate by a quarter of a percentage point with a view to sucking out excess cash with banks.
This was the continuation of the anti-inflationary steps that the RBI had initiated in September and October. In two stages — on September 18 and October 2 — the RBI had effected a combined hike of half-a-percentage points in the ratio of cash reserves that the banks are required to maintain with it.