The 25 bps repo rate hike announced by the RBI in its Second Quarter Review of Monetary Policy was along expected lines given the stubbornness of inflation. The RBI is well aware that the cumulative past policy actions are yet to play their full course. As such, the rate hike is to be seen more as an exercise in managing inflationary expectations than curbing demand. The more important takeaway is the guidance on the peaking of the interest rate cycle and the possibility of a muted response on the rate front from RBI going forward. By laying down clearly that the RBI looks forward to contain demand in the short run, which will lower inflation and inflationary expectations and thus aid in improving supply response in the medium term, Dr D. Subbarao has clearly brought out the policy imperatives. Deregulation of interest rates on savings bank deposits might have some implication for the cost of funds but the Indian banking system is mature enough to handle this transition. The relaxation in branch authoristaion policy in Tier-2 cities is a welcome move and will help in expanding the reach of banking.
Alok K.Misra, CMD, Bank of India. (HBL)
