Monetary Policy for Second Quarter 2011 unleashes the anxieties and concerns over growth when it pegged the current year’s growth at 7.6% in the backdrop of continuing inflationary pressures. The Governor yet another time raised the repo rate by 25 basis points in the fond hope that it would hold the price line albeit at the current levels. Reining in inflation is more important than growth, no doubt. But if the supply factors are contributing to the rising inflation as is the case now, it will be a futile hike. It is also the currency supply, particularly the higher denominations, that has to be pegged.
Yet another measure to give relief from inflation is the deregulation of interest rates on savings bank accounts. Interest is a future income and through this measure, small savers are enabled to get a positive real rate of return on their savings at a future date. It is hoped that the banks would come up with attractive small savings products outside the bond of Rs.1lakh. Banks like the SBI, HDFC Bank etc which have CASA deposits hovering above 46 percent of their total deposits, could find some difficulty initially but over a medium term their ALCO would be able to grapple with the situation and offer competing small savings combo products to their account holders as they cannot risk migration of accounts in a volatile inflation-driven economy.
The Governor threw a veiled threat telling that inflation may not be range bound once the commodity and oil market rate fluctuations are passed on to the consumers. He foresees that the administered rates in these areas are likely to give way to market-determined rates.