Bankers see hints of rate hike in RBI annual policy

Though the Reserve Bank of India (RBI) has maintained a status quo in its policy stance by retaining interest rates at current levels, senior bankers said the Annual Policy Statement 2004-05 has dropped enough hints of a possible hardening of interest rates in the medium term.

"We see the RBI statement hinting at a possible rise in interest rates," said senior bank treasury heads.

The RBI is seen facing a dilemma at this juncture. Explaining this, bankers quoted the policy statement wherein the governor said global factors point in two directions for India.

"In view of the widespread anticipation that international interest rates may rise, there may be a case for raising policy interest rates," RBI governor Y V Reddy said in the policy document.

However, he also pointed out that a hike in rates will have an adverse impact on investment demand, which has shown signs of picking up after a prolonged sluggishness.

The governor made a case for lowering interest rates to foster investment.

"An assessment of domestic factors, which are admittedly more relevant for India, points to stability. But, in the leading economies of the world there is a greater potential for tightening rather than easing of monetary policies," the policy document stated.

The governor stated that the inflationary situation needs to be "watched closely and there could be no room for complacency on this count".

The RBI's policy document has pointed to the "noticeable uncertainties, including geopolitical risks, impacting the international oil economy", which has been reckoned with while designing the stance of the monetary policy.

The governor has drawn attention of bankers to the interest rate uncertainties in global markets. He specified the volatility among major currencies and their impact on capital flows, which, he said, would remain a major concern for emerging economies.

The governor has also reiterated the need for a more intensive approach to intervention in managing large inflows in emerging markets. This is even when, in practice, central banks do intervene in the forex markets in all countries.

"The key issue before the monetary authority is to determine whether the capital inflows are of a permanent and sustainable nature or whether such inflows are temporary and subject to reversal," stated the stance of the policy document.

The RBI governor has also specified in his policy document that measures like trade liberalisation, investment promotion, liberalisation of the capital account, management of external debt, management of non-debt flows, taxation of inflows and use of foreign exchange reserves, could be pursued for sterilisation.

This would be along with open-market operations involving sale of securities to offset the impact of capital inflows on domestic money supply.

While the RBI feels that the price situation is unlikely to cause concern to macro stability, "a very close watch is warranted", the governor said.

The stance of monetary policy will depend on several factors, including prospects for the real sector, especially growth in GDP, inflationary expectations, and global developments.

The central bank further stated: "Notwithstanding the favourable outcomes, monetary management faced severe challenges in maintaining stable liquidity conditions and in reining in inflationary expectations".