BUSINESS

Tight money policy may be continued

Special Correspondent

Y. V. Reddy meets FM ahead of policy review



Inflationary spiral still remains a major concern for Government

Low industrial growth at below 4 per cent is also a cause of worry



NEW DELHI: With the apex bank slated to take up its credit and monetary policy for quarterly review on July 29, Reserve Bank of India Governor Y.V. Reddy on Friday had a meeting with Finance Minister P. Chidambaram here, ostensibly to discuss the overall liquidity situation and the inflationary pressures on the economy.

Following the hour-long meeting, Dr Reddy, however, declined to offer any comments on his deliberations with the Finance Minister.

According to market perceptions, the RBI is likely to continue with its tight money policy for some more time as the various measures already in place till date have not been able to fully douse the inflationary expectations. For, even as the rate of inflation has shown some signs of deceleration, having dipped marginally to 11.89 per cent for the week ended July 12 from 11.91 per cent a week earlier, it is still ruling at a 13-year high.

Clearly, the inflationary spiral still remains a major concern for the UPA Government, especially when the rise in the prices of certain commodities such as imported edible oils, steel and non-administered petroleum products have not yet shown any definite signs of relenting in the longer term.

Therefore, the RBI recipe being anticipated to tackle the inflationary situation is a further tightening of money supply. This could be done by a package mix of yet another hike in the apex bank’s short-term rate of lending (Repo) to banks along with an increase in the CRR (cash reserve ratio) under which it would be mandatory for banks to park larger deposits with the RBI.

Fearing the continuation of such stringent monetary measures, the Federation of Indian Chambers of Commerce and Industry has cautioned the Government that in its zeal to control inflation, the net effect could well turn out to be exactly the opposite. Sucking out liquidity and easy credit availability, the chamber said, might result in deferment of capacity expansion programmes and lead the economy towards stagflation.

The chamber’s warning may appear as making out a case for credit policy liberalisation even in the wake of high inflation, but the fact remains that the low industrial growth at below four per cent in May this year is also a cause of worry for the Government.

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