M A I N   N E W S

RBI pegs GDP growth rate above 7.5 pc
Keeps bank rate unchanged

Mumbai, April 18
The Reserve Bank of India (RBI) today kept key interest rates unchanged to boost investment and moderate prices, while aiming to sustain 7.5 to 8 per cent economic growth in the current fiscal.

Pegging inflation at 5 to 5.5 per cent in 2006-07, the central bank in its Annual Policy, however, raised the interest rates on non-resident rupee deposits and export credit in foreign currency to ensure adequate liquidity in the system through absorption of more foreign exchange.

In the face of upward pressure on interest rates, the RBI kept the benchmark bank rate —the rate at which it lends to commercial banks — and cash reserve ratio — which regulates liquidity in the market — unchanged at 6 per cent and 5 per cent, respectively.

The RBI Governor, Mr Y.V. Reddy also ensured that there was no pressure on short-term rates by not tweaking repo (5.5 per cent) and reverse repo (6.5 per cent) — the rates at which RBI buys and sells bonds to commercial banks.

At his customary press conference, Mr Reddy said: “We are confident about containing inflation...(But) we are worried about global oil prices...the RBI will manage risks as they evolve.”

Pointing that only 15 per cent of the world oil price hike has been passed to domestic consumers, he said: “Oil pass through was yet to take place in our economy.”

The credit policy raised the provisioning to 1 per cent for loans to housing (above Rs 20 lakh), commercial real estate and capital market to improve the quality of lending.

Earlier, the provisioning for such loans was only 0.4 per cent.

The Reserve Bank has raised the risk weight from 125 per cent to 150 per cent on lendings to commercial real estate.

The central bank has, however, retained interest rates on savings bank deposits at the current 3.5 per cent per annum so as not to spur interest rate, but favoured deregulation of the rate in the long run.

“GDP growth may be placed in the range of 7.5-8 per cent during 2006-07 assuming accelerated growth in agriculture under normal monsoon conditions and barring domestic or external shocks,” the RBI said. Despite some uncertainties, the overall industrial outlook continues to be positive. Services sector growth is expected to sustain the momentum, it said. To boost agriculture credit, the RBI simplified and liberalised branch licensing policies for rural banks and set up a working group to address various issues faced by distressed farmers, including review of legal framework for money lending.

Quoting all-India debt and investment survey, the RBI stated that the share of money lenders in total dues of rural households has increased from 17.5 per cent in 1991 to 29.6 per cent in 2002, indicating the high indebtedness of ryots.

Regarding the steep rise in stock prices, the RBI said it was largely driven by domestic mutual funds and foreign institutional investors, who were responding to optimistic market sentiments as well as ample liquidity.

On full convertibility of rupee, the policy said gradual approach to its liberalisation has paid dividends so far.

But continuation of the gradual process may warrant that some hard and basic decisions are taken with regard to macro economic management, particularly monetary, external and financial sector. — PTI