The Reserve Bank of India is well aware that its past policy actions are moderating growth and it will be still quite some time when the full effects of cumulative policy action is seen on the growth front. Given that inflation is much above comfort level, the RBI would not have liked to be seen as not doing anything. Hence, the hike in policy rate in this round of review of policy.

Given the past hikes, the RBI could have signalled its concern on the inflation front through a much smaller dose of rate hike by say 10 basis points or by posturing a hawkish stance.

It is well known that monetary policy is more effective in curbing demand in a high-growth scenario than lifting demand in a low-growth environment. If it has taken two years for the RBI to compress demand, one can very well imagine the time it would take to lift demand, if growth were to take a severe hit.

Lower growth forecast

The RBI has lowered its growth forecasts to 7.6 per cent in 2011-12. Considering past policy actions, today's25 bps rate hike might lead to a hard landing of the economy.

However, clear guidance on the interest rate cycle would negate some of the adverse impacts by reducing uncertainty.

Overall, in the backdrop of a complex growth-inflation dynamics, risks to growth has aggravated from today's policy action.

Savings bank rate was the only major banking product whose price was administratively determined in the post-reform period.

The move to deregulate SB deposit makes the entire interest rate structure market- determined and in that sense needs to be commended. It also reflects the faith of the banking regulator on the maturity of the banks to price SB deposits.

However, it would have been better to anchor the SB rates to the reverse repo rate, to protect the interest of the small savers.

It would be interesting to see how the interest rates in the two slabs of SB deposits evolve.

(The author is Chief Economist, Bank of India.)

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