Banks see repo rate hike in Policy

Banks are expecting a 25-basis-point increase in the repo rate (7.75 per cent at present) "" the central bank's short-term lending rate against government securities "" when the Reserve Bank of India (RBI) announces its monetary policy on April 24.

The expectation arises from the central bank's continued focus on containing inflationary pressures, rather than sustaining the momentum of economic growth. Headline inflation has been consistently above the RBI's 5-5.5 per cent target since December 2006.

This will be the sixth repo rate hike since June 2006.

"We expect the RBI to hike the repo rate by 25 basis points to reinforce its objective of containing inflation and to indicate that it retains a tightening bias," ICICI Securities said in a report.

IDBI Capital Market Services has made a similar prediction in its commentary on the monetary policy. (One basis point is one-hundredth of 1 per cent.)

The report stressed that manufacturing inflation remains firm and that the effects of central bank's monetary tightening, which intensified from December 2006, are yet to show up in data.

Also expected are curbs on foreign capital inflows. Among these measures are limits on overseas borrowings in the form of stricter end-use norms, prior reporting even in cases where no prior approval is required, and a reduction in the ceiling on raising debt overseas.

Bankers said the central bank may also lower the ceiling on interest rate banks can offer on deposits of non-resident Indians (NRIs).

These measures are expected owing to a sustained growth in money supply, which contributes to inflation, mainly on account of foreign inflows in the form of portfolio flows, foreign direct investment, remittances, and overseas borrowings.

Most of the growth in such flows has been driven by the sustained buoyancy of the Indian economy. In this context, IDBI Capital Market Services said the RBI would be required to maintain price stability to ensure growth on an enduring basis.

A rise in the repo rate is also considered a strong possibility because it is much below the 9-10 per cent interest offered on deposits of one to three years.

Former RBI deputy governor S S Tarapore had said the repo rate should be between the deposit rate and the lending rate and not below both, since this would make the RBI a lender of the first resort and not the last.

The RBI is expected to pause after one more repo rate hike and another increase in the cash reserve ratio (CRR), the proportion of cash deposits the central bank requires banks to deposit with it, by June.

ICICI Securities has predicted that the need to maintain tight liquidity conditions will make the RBI raise the CRR by 50 basis points in May or in June. The second 25-basis-point increase in CRR announced on March 30, 2007, takes effect on April 28.

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RELENTLESS RISE

2007
March: CRR up 50 bps to 6.5%, Repo rate up 25 bps to 7.75%
February: CRR up 50 bps to 6%
January: Repo rate up 25 bps to 7.5%, Standard provisioning on commercial real estate loans, personal loans & capital market loans doubled to 2%

2006
December: CRR up 50 bps to 5.5%
October: Repo rate up 25 bps to 7.25%
July: Reverse Repo & Repo rates up 25 bps each to 6% & 7%, respectively
June: Reverse Repo & Repo rates up 25 bps each to 5.75% and 6.75%, respectively