Individuals and corporate borrowers face the prospect of further interest rate increases, as the Reserve Bank of India battles inflation and high credit growth.
The RBI has sent more-than-expected hawkish signals for the need to continue monetary tightening in its report on macroeconomic and monetary developments released ahead of its quarterly policy review on Wednesday.
Underlying inflationary pressures remain, the RBI said and pointed to the fact that it had begun monetary tightening in September 2004 when inflation was relatively low.
Heightened concerns after headline inflation crossed 6 per cent earlier this month, unabated credit growth and robust economic growth make a strong case for RBI to raise the reverse repo rate by at least 25 basis points for the fourth time this year to a five-year high of 6.25, analysts and economists said.
"The macroeconomic assessment, unlike in the past, is not just a status report. It very clearly provides an indication that the stage for a hike in interest rates has been set," said Shubhada Rao, chief economist at Yes Bank.
The RBI has pointed out that though inflation remains relatively modest in several Asian economies, policy actions in the region over the past 18 months reflect pre-emptive monetary tightening.
The RBI has gone to the extent of stating that the relative emphasis between price stability and growth can change depending on the underlying macroeconomic conditions.
Credit growth continues to be over 31 per cent, up after decelerating slightly to 29 per cent about a couple of months ago, and remains at the year-ago level. Banks raised their prime lending rates by 25 to 50 basis points in December after the cash reserve ratio was raised by 50 basis points to 5.5 per cent in two steps effective from December 23 and January 6.
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