Will RBI make credit costly?

(D. H. Pai Panandiker is President of RPG Foundation. The views expressed in this column are his own)

By D. H. Pai Panandiker

The RBI will announce its mid-term credit policy on 27th October. Undoubtedly, the policy makers have been disturbed by the creeping inflation which, at the consumer level, has already crossed 12 per cent.

But it will take more than inflation to raise interest rates.

Interest rates had been brought down since October last year to mitigate the impact of world recession.

The shared view now is that recession has abated. Australia is probably the first country to put monetary policy in the reverse gear. RBI is nearly bent on doing that.

The expectation of the rise in interest rates is not new. It began the day the Finance Minister presented the budget with a deficit of 6.8 per cent.

The State Governments were not far behind and the debt market consequently became overcrowded.

The Government cleverly timed its borrowings. The banking system was overloaded with liquidity. While deposits were accumulating there was hardly any demand for credit. Consequently, banks had to invest their money in Government securities or leave it at the RBI reverse-repo rate window.