New Delhi: Reserve Bank Governor Y V Reddy is likely to do a tightrope walk while reviewing the monetary policy on Tuesday, with a view to containing inflation and ensuring adequate credit flow to sustain high economic growth.
Bankers, who were till a fortnight ago confident that there would be no rate hike in the policy, appear divided after inflation shot up to a four-month high of 5.26 per cent. "Even if the RBI raises the rates, it will be by 0.25 per cent," says an Indian Bank official.
But India's largest lender State Bank of India feels otherwise. "There is a little upward bias on interest rates, though it should not be deemed as pressure," SBI Chairman O P Bhatt said.
RBI appears to be firm in its commitment to ensure an inflation rate of 5-5.5 per cent in FY 2007 and all indications suggest that RBI's monetary policy will be substantially less accommodating this fiscal, the Asian Development Bank said in a report.
With banks moving toward Basel-II norms that require higher provisioning, whatever step the Central bank takes will be in the interest of the banking sector as a whole, feels an Oriental Bank of Commerce official.
The recent upward trend in inflation is likely to put pressure on interest rates, as RBI had raised its two key short term interest rates by 0.25 per cent in July, the fifth such hike since October 2005 to manage inflation.
There are also fears that hardening of interest rates may squeeze credit offtake, thereby affecting the ambitious growth rate projected by the government.
The monetary stance may attempt to balance healthy credit flow to sustain economic growth by relaxing the Cash Reserve Ratio.
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