Repo rates likely to take another 0.25 % hike
By Neelima Shankar
Mar 24, 2010
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It is expected by major economists that the RBI may raise its policy rates by another 25 bps in its monetary policy announcement coming up in April. The economists are expecting that although RBI Governor, D. Subbarao might have refrained himself from raising policy rates during the first half of his term of three years till now, he might have to raise it in 2010.

Analysts are agreeing to the fact that another slot of rate hike in repo and reverse repo rate by 25 basis points is on pipeline following the monetary policy announcement in April 2010.

Repo and reverse repo rates are tools used by the RBI to regulate the flow of money in the economy. Repo rate refers to the rate at which the commercial banks borrow money from the RBI. Reverse repo rate refers to the rate at which the commercial banks deposit their surplus funds with the RBI.

The RBI recently hiked these rates by 25 basis points. Some economists feel that the cash reserve ratio (CRR) should also be increased by another 25 basis points in the monetary policy. Earlier this year, the RBI has already raised the CRR by as much as 75 basis points. This was done as a step to suck out excess liquidity worth Rs. 36,000 crore from the financial system.

But everybody does not seem to have consensus on the issue. "After accounting for a front-loaded calendar, we expect liquidity to be just about comfortable and not excessive. Hence, we do not look for a CRR hike in the April policy," said Deepali Bhargava, India Economist at ING Vysya Bank.

Using the reverse repo window, RBI has collected Rs. 35,315 crore from commercial banks. The Government balances as on March 12, 2010 have amounted to Rs. 101 crore. The RBI is looking at these two aspects to estimate the overall liquidity in the system.

Sonal Verma, Nomura's India economist said, "We haven't yet reached a stage of monetary tightening because interest rates are still far below normal. RBI will have to continue the process of normalization of policy rates, since the economy is growing as per expectations and inflation is on the up-tick as well."

The banks have declared that interest rates would not be increased before April 20th, 2010, it is expected that most of them would first go for raising the deposit rate.


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