RBI hints at no change in rates

RUN-UP TO MONETARY POLICY

The Reserve Bank of India (RBI) is unlikely to change the policy rates "" the repo and reverse repo rates "" in its mid-term review of the monetary policy amid persistent inflationary expectations following copious foreign capital inflows.

Headline inflation has dropped significantly below RBI's target of 5 per cent for 2007-08 but this is a result of the government deciding not to pass on the increase in oil prices to consumers.

"The Indian basket price of crude oil, which averaged $57 a barrel in February 2007, increased to $75 a barrel in September 2007. Thus, headline inflation has remained suppressed due to a halt in pass-through of higher international prices to domestic prices since February 2007," RBI noted in its report on Macroeconomic and Monetary Developments released on the eve of the mid-term review of the 2007-08 policy.

The report said the government would also start feeling the pinch of having to issue bonds to oil companies as compensation for losses that accrue from holding the price line. The government has approved Rs 23,458 crore of bonds in 2007-08.

Also, money supply is at a high of 21.8 per cent against the central bank's target of 17 to 17.5 per cent and copious foreign capital inflows have caused a liquidity glut, which is seen as having significant potential to stoke inflation.

Against this background, key policy rates are likely to be kept unchanged at 7.75 per cent (the repo rate, at which RBI provides liquidity to banks) and 6 per cent (the reverse repo rate, at which liquidity is absorbed from banks), according to analysts.

Though overall credit growth has slowed to 23 per cent year-on-year in October 2007 from 28 per cent in 2006-07, demand for credit from the industrial sector has remained high. The slowdown has been largely because of a slump in demand from interest-rate sensitive sectors, including housing.

Analysts said this should offer RBI some comfort as its objective is to ensure that the genuine credit needs of industry are met and also because banks are likely to marginally lower interest rates on deposits.