Most analysts suggest status quo on lower inflation and global liquidity crunch .
A near consensus seems to be emerging that the Reserve Bank of India (RBI)may hold interest rates stable at the next monetary policy review scheduled for October 24.
Bankers, economists and a finance ministry official, with whom Business Standard spoke, are of the view that the central bank may hold interest rates in an attempt to balance growth with inflation, which has shown signs of moderation in recent weeks.
Meanwhile, former RBI deputy governor S S Tarapore on Thursday said the apex bank should tighten its monetary policy to contain high inflation that can otherwise have serious reverberations on the Indian economy in the next 12-24 months.
“The current inflation rate of 12 per cent is clearly unacceptable to the Indian polity .... Such a high rate of inflation has serious economic, political and social repercussions .... Policy should aim to squelch the current inflation and inflationary expectations,” Tarapore said.
“My view is that the central bank may keep domestic interest rates unchanged. Since inflation is not yet fully under control, no easing of monetary policy is expected,” a finance ministry official said on Thursday , concurring with the view of several economists, who expect RBI to hold rates at the next review.
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HDFC Bank Chief Economist Abheek Barua said: “I think RBI is concerned about domestic liquidity. I expect it to stay on hold, if not cut, rates at the next review.”
“We now expect RBI to keep the repo rate (the rate at which the central bank injects liquidity) unchanged at 9 per cent at the October-24 meeting compared with our previous expectation of a last hike of 25 basis points in the current tightening cycle,” said Rajeev Malik, economist, Macquarie Capital Securities.
| BALANCING ACT Movement in key policy rates (%) | ||
| Effective since | Repo rate | CRR |
| April 26, '08 | 7.75 | 7.75 (+0.25) |
| May 10, '08 | 7.75 | 8.00 (+0.25) |
| May 24, '08 | 7.75 | 8.25 (+0.25) |
| June 12, '08 | 8.00 (+0.25) | 8.25 |
| June 25, '08 | 8.50 (+0.50) | 8.25 |
| July 5, '08 | 8.5 | 8.50 (+0.25) |
| July 19, '08 | 8.5 | 8.75 (+0.25) |
| July 29, '08 | 9.00 (+0.50) | 9.00 (+0.25)* |
“It is highly unlikely that the central bank will hike rates further when the government is facilitating easier access to borrowing. RBI will probably signal a shift to neutral at the October policy review. The key reason for our revision is the backdrop of the ongoing global financial stress. The central bank is unlikely to hike interest rates when it is already trying to ease the overdone tightness in the local money market liquidity,” Malik added.
The country’s Wholesale Price Index-based (WPI) annual rate of inflation stood at 12.14 per cent for the week ended September 6. RBI has said it is aiming to bring down inflation to 7 per cent by the next March.
Malik says inflation may fall to a high single digit by March 2009, after having risen to a near 16-year high of 12.63 per cent this August. “Consequently, RBI will opportunistically prefer to keep the policy unchanged for now rather than tighten it further to bring about a faster decline in the inflation rate,” he said.
Tushar Poddar, vice-president, Asia Economics Research team at Goldman Sachs, said any early cut in interest rates is unlikely as inflation is expected to remain in double digits through 2008. “As the macro concern shifts from high inflation to falling growth, we think the next move by the central bank would be to cut repo rates in the first quarter of 2009,” he said.
Poddar added that in the current global environment, the central bank will remain in liquidity-injection mode.
On Monday, RBI had notified a partial relaxation of overseas borrowing norms for infrastructure companies, a move that Rohini Malkani, economist, Citi India, termed, “long overdue as financial market conditions have changed dramatically since August 2007, when the restrictions were put in place”.
Besides improving inflows, the borrowing norm relaxation is expected to provide support to the rupee. Malkani says the Indian currency will appreciate back to 43-44 to a dollar by March. The relaxation came after the last week’s measures by RBI, which saw it making NRI deposits more attractive and providing additional liquidity in the system.
“With a slowdown in the financial sector and real estate and large companies considering putting on hold new investment decisions, an interest rate hike may adversely impact cement and steel, among other sectors,” said a senior executive of a large public sector bank. He expects RBI not to cut interest rates in the near future.