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P. Mukherjee

THE RBI Governor, Mr Y. V. Reddy, has obviously targeted inflation in the Mid-Term Review.

The central bank has raised its point-to-point inflation projection to 6.5 per cent from 5 per cent.

Similarly, the GDP growth projection has been downscaled to 6-6.5 per cent from 6.5-7 per cent, earlier.

These are more or less in line with government estimates.

The Governor has noted that the pick-up in investment activity and significant growth in non-food credit appears to be broad-based and is not a temporary phenomenon.

In this regard, he has also indicated that government borrowing for the remainder of the year would have to be suitably `calibrated' in view of the strong credit demand.

In this backdrop, that only 29 per cent of the net budgeted Central Government borrowings have been completed might cause some nervousness in the market.

While no specific reference was made to the official central bank `stance', a small upside bias is now creeping in. Obviously, the Governor would like to balance growth with price stability.

The repo rate hike, while not entirely unanticipated, has come as a bit of a surprise as there was a feeling that the runaway horse of inflation was just coming under control. Over the last week the environment had changed to one of relative stability. As a result, the initial market reaction of dismay is understandable.

The markets were betting on a hike to come later. Some might speculate that the present hike has left the door open for further hikes in the future, albeit at a `measured' pace.

The action of raising risk weightages for housing and personal loans appears to be an effort to check the over-exuberance in the retail assets market, though there seems to be some hint that this could be a temporary factor.

(The author is Head, Treasury, UTI Bank.)

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