The Hindu : Business : U.S. situation to be watched: FM

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Wednesday, Jan 25, 2006

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Business

U.S. situation to be watched: FM

Special Correspondent

`Repo rates may be reversed if external conditions improve'

NEW DELHI: Finance Minister P. Chidambaram on Tuesday said that the increase in repo rates by the Reserve Bank of India should be viewed as "pre-emptive action" by the central bank and could be reversed if the external situation improved.

Commenting on the RBI's third quarter review of the monetary policy, Mr. Chidambaram said: "The 25 basis points hike in repo rates, I believe, is a pre-emptive action by the RBI which wants to be ahead of curve (in keeping inflation under check)... As soon as the external situation clears and stabilises, I believe it could be reversed."

Explaining further, he said: "We have to keep a watch on the U.S. situation on January 31 and March (when the U.S. Federal Reserve Committee will meet). This is a pre-emptive action. I understand they [the hike in repo rates] could be reversed if the situation is right."

In the wake of strong credit and consumer demand, the marginal interest hike in repo rates was a clear signal that both the Government and the RBI wanted to keep inflation under check at below five per cent.

"We do not want to stoke inflationary expectations," Mr Chidambaram said. In fact, he expected the interest rates to remain stable in the medium and long term.

Noting that the RBI had neither changed the benchmark Bank rate nor the CRR (cash reserve ratio), Mr Chidambaram said: "This is a clear indication that in the medium term and long term, [the] RBI wished to keep the interest rates stable."

The RBI, Mr Chidambaram said, provided adequate liquidity to all borrowers even as it had a number of other instruments to control the liquidity situation.

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