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RBI not to follow US Fed

January 08, 2005 15:43 IST

The Reserve Bank of India Governor Y V Reddy on Friday virtually ruled out a rate hike following the footsteps of the US Federal Reserve.

"In the past also when there have been changes in the US interest rate, it was not followed by the central bank here," Reddy told reporters on the sidelines of Indian Institute of Banking and Finance's Sir Purshotamdas Thakurdas Lecture delivered by president of US-based Yale University, Richard C Levin when he was asked whether the Indian central bank would review the rates in the light of the US rate hike.

"It (the Fed rate hike) is a relevant factor but the weight is still on the domestic factors in determining interest rates while not ignoring global factors," Reddy said.

India did not lower rates when the US Federal Reserve was on a rate lowering spree and will not follow them even now, Reddy said.

The US Federal Open market committee at its meeting on December 14 had observed that US rates were below the level necessary to keep inflation stable.

US analysts feel the US Fed will increase its rate by 25 basis points at every meeting until it reaches a level of 3.5 to 4 per cent. At present it is pegged 2.25 per cent, up from 1 per cent last June.

Reddy said though there is "certain pressure" owing to the increase in prices of steel, sugar and cement, there is no need for RBI to revise its inflation and gross domestic product forecasts.

He, however, said RBI is keeping a watch on inflation. Inflation fell to a six-month low of 6.39 per cent in the week ended December 25 from 6.50 per cent in the preceding week.

The RBI governor felt it is still early for the RBI to consider the inflation figures as a trend and act accordingly. RBI raised its inflation projection for 2004-05 in October to around 6.5 per cent from 5.0 per cent as wholesale price index rose to over 7 per cent from 4.6 per cent at end-March 2004. It had also lowered its GDP projection for the year to 6.0-6.5 per cent from 6.5-7.0 per cent.
BS Banking Bureau in Mumbai