Curbing Inflation

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Ever since the inflationary beast crossed RBI’s tolerance level on March 1, 2008, there has been no looking back. As a matter of fact since then inflation has surged by over 84%. In fact the Central Bank has finally accepted that curbing inflation is its prime objective and has been taking a series of measure to limit the beast. As an antithesis to the efforts, the beast has been galloping at a faster pace and is pegged at a 13 year high at 11.42%; it is evident that the public’s ‘tryst with inflation’ continues.

The two recent measures, increasing the repo rate (rate at which the central bank lends to banks overnight) and CRR (cash reserve ratio, proportion of deposits that banks are required to keep with the central bank) by 50 basis points (bps) will have its impact on the corporate houses as well as individuals. As a measure to anchor inflation, the hike in CRR will suck Rs.200 billion from the market and help in restraining demand. For banks already struggling with high borrowing costs, the added burden will only lower its earning from each loan. Amid tightening monetary policy, it is the individuals and the banks that are the worst hit; individuals will either have to increase their loan repayment period or else bear the brunt of increased lending rates. And for the banks the difference between the interest earned from loans and the amount paid to depositors will further narrow down. “The CRR and Repo rate hikes are larger than expected. These will increase the costs for banks who in turn are expected to raise lending and borrowing rates in the days to come. Higher rates are expected to impact both consumers and corporates,” Dipen Shah, VP, PCG-Research Kotak Securities tells 4Ps B&M.

Banks have already started raising their prime lending rates (PLR); SBI has increased its BPLR to 12.75%, Union Bank to 13.25% ICICI to 13.50% et al and others are considering similar moves. For an individual who wants to settle the loan repayment in time, it means an increased EMI (for instance, for an amount of Rs.2 million for a period of 20 years the EMI at 12.25% would be Rs.22,371 while in the present scenario it could be as high as Rs.24, 147). Further, corporates too need to rethink on their capex plans for the cost of working capital and long term debts are likely to move northwards. In such a scenario it’s only those who have surplus cash who can benefit by higher interest rates on their savings; but considering the double digit inflation the fears of negative interest on the surplus looms large.

However the question is, will the RBI continue tightening monetary policy? Tushar Poddar, VP Asia Economic Research, Goldman Sachs, avers, “The RBI will wait and watch inflationary trends over the next several weeks, particularly signs of pass through to broad based inflation and broad money growth, before raising rates again.” Well, as everyone battles with inflation RBI’s next review of the monetary policy will be worth watching.

Gyanendra Kashyap

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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