The recent hike in the repo and reverse repo rates by the Reserve Bank of India in the third quarter review of the monetary and credit policy is an indication of the interest rate scenario that awaits us. With the constantly reducing liquidity in the system, should we expect a new interest rate regime?

The interest rate regime in India seems to be a matter of interest for everyone today. The inflation rate is witnessing a steady but manageable rise; the proactive stand of the finance minister seems to have influenced the rise in the CRR by 50 bps on September 11, last. In earlier situations, the government resorted to the micro-level measures in order to contain the prices of some key items such as crude oil, sugar and steel through the process of liberalized imports and cut in customs and excise duties. But in order to have a proper control over inflation, macro-level efforts were required by the central bank. The rise in the CRR level in two phases was primarily aimed towards mapping up around Rs. 8,000 cr of lendable resources from banks. The central bank's move appears to be sensible more because of the inflationary trend in the current fiscal in the backdrop of strong growth in industrial production with the rise in price level reflecting that the demand side is stronger than the supply side, except in case of petroleum crude. With the strong growth in the non-food credit on one hand and the reduced liquidity on the other, there is a possibility of rising interest rate scenario.

The present tightening of the liquidity in the system is evident from the utilization of access to the repo¹ windows of RBI, NABARD and SIDBI. The redemption of the India Millennium Bonds (IMD) and the substantial expansion in the credit to the agricultural and industrial sectors have led to this situation. The reverse repo transaction has come down to a large extent. In contrast, RBI is infusing funds into the system through the repo window. The inclination towards government securities has also come down. The actual Statutory Liquidity Ratio (SLR) investment that was once nearly 40% against the minimum stipulated 25% is also gradually coming down.

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