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`RBI initiatives will help curb inflation'

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Credit squeeze due to rate hikes unlikely, says Chidambaram

New Delhi , July 25

The Finance Minister, Mr P. Chidambaram, on Tuesday hailed the initiatives of the RBI in its first quarter review of the monetary policy statement for 2006-07, stating that these measures would help control inflation and spur growth.

"The whole idea is to contain inflation. The measures taken by the RBI Governor will curb inflationary expectations. The Government broadly agrees with the central bank's assessment," Mr Chidambaram told presspersons here.

The Finance Minister also said that there would not be a credit squeeze in the wake of hike in interest rates by the central bank.

Mr Chidambaram said the RBI Governor had emphasised that he would ensure that productive sectors of the economy would not be denied credit. "I am confident that they would be able to do that," he said.

The Finance Minister said the RBI recognises that risks are short-term and therefore increased the reverse repo and repo rate by 25 basis points. He said the RBI intends to re-price these risks as most other central banks have done in the last few weeks and months.

The Finance Minister also said that the economy was expected to grow at a healthy rate during this year too.

The Punjab National Bank Chairman and Managing Director, Mr S.C. Gupta: There will definitely be an adjustment to the deposit rates and also the lending rates. The market sentiments cannot be ignored. We will in the next seven days work out the impact of the RBI move and take appropriate action

The RBI move (on the repo rate and reverse repo rate) would not exert much pressure on the bond market. The market had already factored in a 25-basis point hike. Bankers will have to manage risks in securities portfolio by reducing duration.

The IndusInd Bank Managing Director, Mr Bhaskar Ghose: Dr Reddy succeeded once again in surprising market players - this time, by NOT pulling his customary surprise on the market!

It was expected this time that interest rates would be increased by 25 bps (down from the original expectation of a 50 bps hike, after the Fed Reserve moderated its interest rate stance recently) - as an outcome of rising crude prices, increasing inflationary pressures, and hardening overseas interest rates. Also, helping RBI making this decision was its own confidence in the Indian economy, with industrial activity continuing to be robust and liquidity concerns continuing to be low for the immediate future.

The banking sector is expected to react by factoring in this 25 bps hike in its interest rates for short-term deposits and short-term loans (i.e., with tenors below one year). However, medium-term rates are unlikely to be affected, unless the Fed Reserve raises its rates in August, prompting RBI to follow suit in October 2006; till then, there is really no case for reviewing medium-term rates on deposits and loans. Long-term interest rates (for loans and deposits above three years in duration) might remain easy, given the expectation of an easing cycle by then.

Mr K.V. Kamath, MD and CEO, ICICI Bank:

"We as bankers would follow the policy indications given by RBI and believe that the financial system is well positioned in the context of these emerging trends."

Quantum Mutual Fund: Fund Manager and Head - Fixed Income, Mr Devendra Nevgi: future interest rate path and inflation. All the other key rates as well as monetary variables targets are left unchanged. One significant statement by the RBI is that the interest rate direction can't be "unidirectional", which makes clear that the further rate hikes in the current quarter would be driven by incoming data on growth and inflation.

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