The Hindu : Business : RBI revises GDP growth projection upwards

Online edition of India's National Newspaper
Wednesday, Oct 26, 2005

Business

Business

RBI revises GDP growth projection upwards

Special Correspondent

Leaves Bank Rate unchanged; IBA to review PLR systems

TWIN OBJECTIVES: The Reserve Bank of India Governor, Y. V. Reddy, with the Deputy Governors, Shyamala Gopinath (right); Rakesh Mohan (second from left), V. Leeladhar (left), on their way to announce the mid-term review of annual policy in Mumbai on Tuesday. — Photo: Paul Noronha

MUMBAI: The Reserve Bank of India (RBI) on Tuesday raised the reverse repo rate (the rate at which the central bank borrows from the banks) by 25 basis points to 5.25 per cent from the current level of five per cent with effect from October 26 in view of the current inflationary pressure. However, the Bank Rate (the rate at which central bank lends to commercial banks), has been kept unchanged at 6 per cent.

"Given the outlook for inflation in the context of the oil economy in India, it may be difficult to contain the inflation in the range of 5 to 5.5 per cent projected earlier, without an appropriate policy response,'' said Y. V. Reddy, Governor, RBI, while raising the rate in the Mid-term Review of Annual Policy of 2005-06. "It is also necessary to recognise and formulate a forward looking policy response, in a manner that the growth momentum and the potential for higher growth are realised without adding to inflation expectation.''

Oil worry remains

"Oil price remains the single largest risk to the global economy exacerbated by the continued increase in global demand, geopolitical uncertainties, strong refining demand and a series of supply disruptions. It has a large permanent component which needs to be eventually passed on to the consumers in the medium term but could lead to a significant increase in domestic inflation and higher interest rates in the short-term,'' Dr. Reddy warned.

Based on the current assessment of a pick-up in agricultural output and in the momentum in other sectors the GDP growth projection for 2005-06 is revised to 7 to 7.5 per cent from the earlier projection of around 7 per cent.

"We concluded there are basically two areas of concern, price stability and credit quality,'' said Dr. Reddy while stating the monetary policy stance for the remaining part of the financial year.

Dr. Reddy further said there was a need to review the current procedures and processes of pricing of credit through a well-structured and segment-wise analysis of costs at various stages of intermediation in the whole credit cycle. "There is a public perception that there is underpricing of credit for corporates while there could be overpricing of lending to agriculture and small and medium enterprises (SMEs).'' He said the current system had not fully met expectations. The Indian Banks' Association in consultation with member banks would review the benchmark prime lending rate (BPLR) system and issue transparent guidelines. "Competition has forced the pricing of significant portion of loans far out of alignment with BPLRs and in a non-transparent manner.''

Dr. Reddy also asked banks to encourage financial savings. "What is unique about a bank compared to other financial institutions?'' asked Dr. Reddy. There is a need for greater deposit mobilisation in the country, he stressed.

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