In an effort to tackle the impact of rising inflation on credit growth, especially in the rural and agricultural sector, the finance ministry is considering various options in consultation with the Reserve Bank of India.
Banking sources said that the RBI feels that a hike in interest rate is called for going by the inflationary outlook and a need for real interest rate to become positive.
However, it is increasingly becoming a tight rope walk as a revision in the rate upwards will be soon followed by hike in lending rates by the banking industry.
The RBI may defer rate hike and this will create a situation where banks will defer the hike in lending rates despite the rise in inflation so that recovery in the economy, especially the agenda of rural credit growth, is not hampered.
The second option being deliberated upon is to reduce the lendable resources so as to curtail money supply which figured at 15.7 per cent in August 2004 as against 11.7 per cent last year during the same period.
One of the ways to do this is to hike the cash reserve ratio. While it might impact the credit pick up in the industrial sector temporarily till the time oil prices cool down, agricultural credit will not be affected as banks have been already given limits and targets.
However, bankers pointed out that it is highly unlikely that the RBI will jack up the CRR.
Sources added that these measures will be temporary till the time oil prices rule high. They also added that although the inflation is fuelled mainly by imported factors, excess liquidity in the system is contributing to the money supply and thus to inflation.
Sources also said that increased intervention in the bonds market or the forex market will also curtail the liquidity but it may also have its impact on the government borrowing programme, part of which is scheduled to take place in the second half of the year.
They further added that foreign exchange intervention is a more likely way as the portfolio inflows and corporate inflow in the forex market through exports and foreign institutional investors have started making a comeback to the Indian market.
Moreover, going by the forward market levels and reduced interest rate of the foreign exchange swaps, the outlook for rupee looks bullish, added sources.
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