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The RBI Governor, Dr Y.V.Reddy, addressing a press conference in Mumbai on Tuesday. — Paul Noronha

Mumbai , Oct. 26

THE coming months may see rising commodity prices and lower economic growth if the signals in the RBI's Mid-Term Review of the Annual Policy Statement are anything to go by.

The RBI Governor, Dr Y.V. Reddy, scaled down the GDP growth projection for the current fiscal to between 6 and 6.50 per cent as against the previous forecast of 6.5 -7 per cent.

The central bank has marked up the inflation estimate to 6.5 per cent, against the previous estimate of 5 per cent.

The RBI also hiked the repo rate - the interest rate paid on bank funds placed with the RBI against government paper - by 25 basis points to 4.75 per cent. The bank rate and the Cash Reserve Ratio were left unchanged.

The lower GDP growth projection was on account of the deficient monsoon and the impact of higher oil prices, Dr Reddy said, addressing a press conference here today.

"The energy intensity of GDP growth has increased in India. However, taking all factors into account, we feel that 6 to 6.5 per cent is a good growth rate. In fact, if you remove the impact of the adverse monsoon conditions, we would have had a growth rate similar to last year. This in itself is indicative of the resilience in the economy," he said.

In the context of managing inflation, Dr Reddy said that a little more attention to demand management along with liquidity management would be warranted to combat inflationary pressures.

The harmonised approach to the external oil shocks by the oil companies and the central bank, in trying not to pass on the high oil prices to consumers, has ensured that the shock is moderate.

During the current financial year, the RBI has observed a significant increase in non-food credit of 11.5 per cent (Rs 92,443 crore) as compared to an increase of 6.0 per cent (Rs 41,034 crore) in the previous corresponding period.

"The incremental credit-deposit ratio at 96 per cent as against 38 per cent in the corresponding period of the previous year, is indicative of the acceleration of economic activity. The growth in non-food credit has by and large been broad-based and, therefore, is not a temporary phenomenon. Non-food credit must expand to maintain growth momentum, however, it must be constrained to good quality assets," said Dr Reddy.

Other key measures announced in the policy include risk containment measures with regard to housing loans and consumer credit by banks.

The apex bank has observed that in the recent past the growth of housing and consumer credit has been very strong and has suggested an increase in the risk weight to 75 per cent from 50 per cent in the case of housing loans and to 125 per cent from 100 per cent in the case of consumer credit including personal loans and credit cards, as a temporary counter cyclical measure.

The ceiling on NRE deposit rates has been raised to 50 basis points above the existing level of US dollar/Libor swap rates, in a bid to align the rates on deposits with international interest rates, RBI has said.

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RBI signals lower economic growth — Focus on demand, liquidity management to combat inflation'

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