rediff.com

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  

Rediff News  All News 
Rediff.com  » Business » RBI may be done with rate hikes for now: Rajan

RBI may be done with rate hikes for now: Rajan

Last updated on: October 30, 2013 19:40 IST

After two rate hikes in less than six weeks aimed at curbing inflation, RBI Governor Raghuam Rajan on Wednesday said the central bank may be done with interest rate increases as their impact on the economy is assessed.

"We think we have done enough on rate hikes given what we know about the economy to wait and watch and see what happens," Rajan told analysts in a customary post-policy conference call.

Rajan said the RBI does not have a target interest rate. "I won't say that we have a set of rate hikes in mind. It is not that we are trying to take baby steps towards some longer-term interest rate goal that we have in mind," he said.

Since taking over at the RBI on September 4, Rajan has hiked the repo rate at which it lends to banks to 7.75 per cent, seeking to tame inflation. The rate went up by 25 basis points each on September 20 and October 29.

The RBI has increased its estimate for wholesale price inflation to over 6 per cent and consumer price inflation to over 9 per cent for the end of the financial year.

A better way of describing what the RBI is doing on interest rates is that "when there is lot of uncertainty you may move a little less than what everybody thinks may be necessary...and also because there are forces that you can't quite estimate which may come in and help or hinder your effort," Rajan said.

On the rupee, Rajan said he would consider the local currency to be stable only when dollar demand from oil companies returns to the market. Oil companies currently have a special swap window provided by the central bank to meet their dollar requirements, a facility that Rajan said would be tapered gradually.

The Governor said the RBI does not have any value for the rupee. The RBI on Tuesday calibrated the window between the repo rate (7.75 per cent) and marginal standing facility (8.75 per cent) to 100 basis points, as stated in the September 20 mid-quarter review.

"Once there is adequate liquidity, the price of money in some sense will move down from the MSF to the repo very quickly," Rajan said.

"At this point, the system is still borrowing from the MSF window, which means that the term repos are priced closer to the MSF window rate and therefore the rate is still higher than the repo rate," Rajan said.

He went on to add that "the time frame we have for that coming down is not determined as much by monetary policy as by the concerns about the external sector and making sure that the external sector is fully in balance as we bring down that rate finally to the repo rate. I wouldn't say the time frame is of the order of quarters, which would be that consistent with monetary policy, but it is shorter than that."

On the liquidity front, Rajan said he still has some more tools. "There are a variety of instruments we have, but there are a variety of market forces that can also add liquidity into the system. For example, if government spending picks up that would certainly add liquidity into the system. Other instruments like OMO and deposit growth would also help." the Governor said. 

© Copyright 2013 PTI. All rights reserved. Republication or redistribution of PTI content, including by framing or similar means, is expressly prohibited without the prior written consent.