RBI is more towards promoting growth than controlling inflation

Author: Neha Dhamija

After announcing a cut in repo rate long back in 2004, RBI has reverted to this measure after a gap of four years. The rate at which the apex bank lends to other banks for a period of one to three days has been lowered by 100 basis points. Suhir Gokarn of Standard &Poor’s opined that this act of RBI reflects the shift in focus from controlling inflation to help the economy grow.

Gokarn added that further cuts in repo rate are expected till signs of growth are discovered. Tushar Poddar of Goldman Sachs echoed with Gokarn saying that he was already anticipating a cut of 150 basis points by first quarter of 2009, but now the magnitudes may be greater than the ones thought. Gokarn also said that RBI should come up with an explanation of such great cut in repo rate, nevertheless this can create panic among market players.

Despite the current inflation rate of 11.44, which is significantly greater than the RBI’s comfortable level of 5%; PM Manmohan Singh said that tracking of commodities’ prices shows that inflation is falling gradually and is expected go continually do so.

The cut in repo rate, however, does not seem to do much as banks are depending less on this source of funds. Consequently, the transactions in repo window stand at $7.8 billion, as against the $16 billion, when it peaked.