RBI may hike repo, reverse repo rates

RUN-UP TO THE CREDIT POLICY

Indian and foreign bankers are expecting the Reserve Bank to raise repo and reverse repo rates by 25 to 50 basis points each.

The RBI sells government securities to absorb overnight liquidity from the banking system through the reverse repo rate and buys securities to infuse liquidity through the repo rate. One basis point is one hundredth of a per cent.

Bankers also expect the RBI to stipulate specific restrictions on property lending, which has been driving credit expansion.

Lending by banks expanded by Rs 82,614 crore in December 2006, about one-third of the increase in the nine months ended December 2006.

Predicts S P Prabhu, head of fixed income at IDBI Capital Markets, "Taking into account inflation hovering at 6 per cent, higher credit growth and the resultant high growth in money supply, the RBI is expected to raise the reverse repo rate and the repo rate by 25 basis points each to 6.25 per cent and 7.50 per cent, respectively and maintain the corridor for money market rates at 125 basis points."

Money supply has grown at 19 per cent against the RBI's target of 15 per cent.

Added ICICI Securities's Prasanna A: "To consolidate the gains from the cash reserve ratio (CRR ) hike the central bank ought to nudge up the liquidity adjustment facility rates in this review. We believe that RBI will adopt this line of thought."

The overnight call money rates have been much above the repo rate of 7.25 per cent since the first CRR hike came into effect on December 23, after being close to the reverse repo rate earlier. This is considered monetary tightening by stealth.