The Reserve Bank of India (RBI) is likely to keep interest rates stable in its monetary policy review later this month in view of the impending domestic oil price hike, and a possible US Federal Reserve rate cut, which can lead to larger capital inflows into India, opine bankers and economists.
“RBI is likely to signal a stable interest rate regime for this quarter. We feel RBI might maintain both the repo and reverse repo rates at the same level,” Indian Banks’ Association Chief Executive H N Sinor told PTI here on Sunday.
In its last monetary policy review for 2007-08 this month-end, RBI is likely to continue with its tight monetary policy initiated in mid-2006 with inflationary and excess liquidity pressures persisting.
A possible recession in the US would also be factored in by RBI, as a widely-expected Fed rate cut could lead to large capital inflows into India, putting pressure on the appreciating rupee and liquidity management.
“Money supply is expanding rapidly and a US Fed cut will attract more inflows,” Bank of Baroda Chief Economist Rupa Rege Nitsure said. “The interest rate differential between India and the US, presently at 3.50 per cent could widen to 4 per cent then, leading to greater inflows, putting liquidity management under pressure,” she added.
Inflation, though benign currently, will also be on RBI’s radar as a possible petroleum price hike domestically, could fuel it past the four per cent mark in the coming weeks. “Inflation could breach the four per cent mark,” IDBI Capital Managing Director & CEO Sushil Muhnot said. “Globally, fuel prices are high and food prices firming up and hence inflation-control will continue to be a focus area for RBI,” he explained.
May soften stand
Bank of Maharashtra Chairman & Managing Director M D Mallya said while no rate cuts were expected, some signal towards a softening could be expected. On whether he expected reduction in cash reserve ratio, Mr Mallya added, “with fund inflows expected to put pressure on liquidity management, RBI might not reduce it.”
“We did not discuss the CRR issue with the RBI during our meeting with Deputy Governor Rakesh Mohan, Indian Banks’ Association Chief Executive said, adding that “RBI still feels that there is excess liquidity in the system.”
However, there is a possibility of the apex bank restoring remuneration to banks on CRR maintained by them with RBI. The apex bank had stopped paying interest on the funds parked by banks with it since April 2007. “The banking industry has suffered a Rs 4,600-crore loss on account of this,” he added.
