Mint Road seen maintaining status quo on interest rate

Credit policy announcement on April 28

The Reserve Bank of India (RBI) governor Yaga Venugopal Reddy will unveil the annual policy statement for 2005-06 on April 28.

Bankers expect the Indian central bank to leave key interest rates untouched in the backdrop of the finance minister P Chidambaram spelt out stability on the rate front for the coming six months. This is despite the US Federal reserve hiking its base rate to 2.75 per cent last week.

In the Indian markets, the reverse repo rate (the rate at which the central bank sucks out funds in exchange for securities) was last hiked in October 2004 by 0.25 per cent to 4.75 per cent.

In the same month, the cash reserve ratio (the cash balance that banks have to maintain with RBI) was hiked by 0.50 per cent to 5 per cent, thereby draining out about Rs 7,000-8,000 crore from the system.

The bank rate (the rate at which RBI offers refinance to banks) was last tinkered with in April 2003 when it was reduced by 0.25 per cent to 6 per cent, a three-decade low since 1971.

The US Federal Reserve has raised its base rate by seven times "" 25 basis points each "" since June 2004 to 2.75 per cent.

Said Cherian Varghese, chairman & managing director, Union Bank of India, "We would like stability to continue. We want to see some sort of direction fromt the policy. If the rates are not touched there will be a sense of comfort not just for banking system but also for customers."

There is ample liquidity in the system averaging Rs 20,000 crore. The other governing factor for rates is inflation. Although inflation seems to be under control at present.

However, if prices of commodities like oil, metal, sugar and cement continue their northward movement, the situation could turn worrisome. RBI may not touch rates this time and opt for the status quo since it would want to buy more time, said a debt market analyst in a foreign brokerage.

The yield on the ten year paper closed today at 6.65 per cent unchanged from Thursday's levels. The sentiment in the markets was bullish with a rally expected before the close of the fiscal year.