RBI to keep interest rates stable
By Vaibhav Aggarwal
Sep 26, 2008
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The Reserve Bank of India (RBI) governor D Subbarao will present his mid-term credit policy review for 2008-09 on October 24. The governor is likely to hold the interest rate stable in an attempt of shifting focus to reviving growth from curbing inflation, which has shown signs of moderation in the recent weeks.

RBI will keep its short-term lending rate unchanged at 9 percent at the next policy review. India is also unlikely to add to this year's increases in the so-called cash-reserve ratio (CRR), the proportion of deposits banks must hold in reserves, because there's less spare cash in the financial system.

Rajeev Malik, economist, Macquarie Capital Securities said, "We now expect RBI to keep the repo rate (the rate at which the central bank injects liquidity) unchanged at 9 percent at the October-24 meeting compared with our previous expectation of a last hike of 25 basis points in the current tightening cycle."

"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.

However, the former RBI deputy governor S S Tarapore warned the central bank against shifting its priorities from inflation to growth. "The central task of monetary policy is to bring a quick and enduring reduction in inflation rate. The RBI should not be swayed by the doves who advocate a replication of the monetary policy in industrial countries and China," he said.

Tarapore feels that the true rate of inflation currently is around 16-17% and such high inflation has serious economic, political and social repercussions. Therefore the policy should be aimed to suppress the inflationary pressure.

The rate of inflation in Asia's third-largest economy tripled this year to 12.14 percent in the first week of this month. The rate touched 12.63 percent, the highest since 1992, in August. RBI is targeting to bring down this rate to 7 percent by March 2009.

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 percent 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.

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