Price rise tactics shift

Slashing interest rates on NRI deposits and splitting the commodity market into priority and non-priority segments form, inter alia, the government's latest blueprint to tame inflation. Moving away from the sledgehammer tactics of price control, the Centre is now planning to adopt a more nuanced approach.

It is, therefore, considering paring interest rates on Foreign Currency Non-Resident (B) Accounts from the current 5.5-6.5%.

The rates were originally aligned to Libor (the London inter-bank overnight rate), which has since eroded to 2.5%, as of Wednesday. Government officials said there was fresh room to narrow the differential, especially after interest rate cuts by the US Federal Reserve.

Speaking about the possible change, HDFC Bank chief economist Abheek Barua said though the interest rate differential did matter, currently arbitrage possibilities were limited. "However, if the government sees an excess inflow of money through private remittances or NRI deposits, especially since NRI deposits are arbitrage driven, they can tweak the rates by closing the margin to control this inflow," he said.

The government is also planning to restructure the commodity market to create a non-priority segment that would contain commodities that have a limited impact on inflation, or have a lower weight in the wholesale price index. The priority segment would include agricultural commodities and crude oil. Officials said the idea was not to ban futures trading but to discourage it.

The government's view is that concentrating commodity trading in the non-priority sector would help it tame inflation, while at the same time tone down the political rhetoric against futures trading.